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# Chapter 7 Revenue 11th Commerce Concept

MEANING OF REVENUE

The amount of money that a producer receives in exchange for the sale proceeds is known as revenue. For example, if a firm gets 16,000 from sale of 100 chairs, then the amount of 16,000 is known as revenue. Revenue refers to the amount received by a firm from the sale of a given quantity of a commodity in the market.

Revenue is a very important concept in economic analysis. It is directly influenced by sales level, (... as sales increase, revenue also increases.

Concept

CONCEPT OF REVENUE

The concept of revenue consists of three important terms: Total Revenue, Average Revenue and Marginal Revenue.

Concept Total Revenue (TR)

Total Revenue refers to total receipts from the sale of a given quantity of a commodity. It is the total income of a firm. Total revenue is obtained by multiplying the quantity of the commodity.

Total Revenue = Quantity x Price

For example, if a firm sells 10 chairs at a price of Rs. 160 per chair, then the total revenue will be:

10 Chairs x Rs. 160 = Rs. 1,600

Concept

Average Revenue (AR)

Average revenue refers to revenue per unit of output sold. It is obtained by dividing the total revenue by the number of units sold. For example, if total revenue from the sale of 10 chairs @ Rs. 160 per chair is Rs. 1600, then: Concept

AR and Price are the Same

We knew, AR is equal to per unit sale receipts and price is always per unit. Since sellers receive revenue according to price, price and AR are one and the same thing. This can be explained as under:

TR = Quantity x Price Putting the value of TR from equation (1) in equation (2), we get AR = Price

Concept

AR Curve and Demand Curve are the Same

A buyer's demand curve graphically represents the quantities demanded by a buyer at various prices. In other words, it shows the various levels of average revenue at which different quantities of the good are sold by the seller. Therefore, in economics, it is customary to refer AR curve as the Demand Curve of a firm.

Concept

Marginal Revenue (MR)

Marginal revenue is the additional revenue generated from the sale of an additional unit of output. It is the change in TR from sale of one more unit of a commodity.

MBn =THn TR

Where:

MRn    = Marginal revenue of nth unit;

TRn         = Total revenue from n units;

TRn-1    = Total revenue from (n-1) units;

N          = number of units sold

For example, if the total revenue realised from sale of 10 chairs is Rs. 1,600 and that 11 chairs is Rs. 1,760, then MR of the 11th chair will be:

MB11  =  TR11 -  TR10

MR11 = Rs. 1,780 – Rs.  1,600 = Rs. 180

Concept

One More way to Calculate MR

We know, MR is the change in TR when one more unit is sold. However, when change in units sold is more than one, then MR can also be calculated as: Let us understand this with the help of an example: If the total revenue realized from sale of 10 chairs is Rs. 1,600 and that from sale of 14 chairs is Rs. 2,200, then the marginal revenue will be: Concept

TR is summation of MR

Total Revenue can also be calculated as the sum of marginal revenues of all the units sold.

It means,     TRn  =   MR1  + MR+ MR+ ………………. MRn

Or, The concepts of TR, AR and MR can be better explained through Table 7.1

Table 7.1: TR, and MR Concept

Relationship Between Revenue Concepts

The relationship between different revenue concepts can be discussed under two situations:

1. When Price remains Constant (It happens under Perfect competition). In this situation, firm has to accept the same price as determined by the industry. It means, any quantity of a commodity can be sold at that particular price.
2. When Price Falls with rise in output (It happens under Imperfect Competition). In this situation, firm follows its own pricing policy. However, it can increase sales only by reducing the price.

Detailed discussion on Perfect and Imperfect Competition is given in Chapter 10.

Let us now discuss the relationship between different revenue concepts, when:

1. When Price remains constant;
2. When Price Falls with rise in output.

Concept

Relationship between AR and MR (When Price remains Constant)

When price remains same at all output levels (like in case of perfect competition), no firm is in a position to influence the market price of the product. A firm can sell more quantity of output at the same price (see Table 7.2). It means, the revenue from every additional unit (MR) is equal to AR As a result, both AR and MR curves coincide in a horizontal straight line parallel to the X-axis as shown in Fig 7.1.

Table 7.2: AR and MR (When Price remains Constant) As seen in the given schedule and diagram, price (AR) remains same at all level of output and is equal to MR. As a result, demand curve (or AR curve) is perfectly elastic.

Always remember that when a firm is able to sell more output at the same price, then AR MR at all levels of output.

Concept

Relationship between TR and MR (When Price remains Constant)

When price remains constant, firms can sell any quantity of output at the price fixed by the market. As a result, MR curve (and AR curve) is a horizontal straight line parallel to the X-axis. Since MR remains constant, TR also increases at a constant rate (see Table 7.3). Due to this reason, the TR curve is a positively sloped straight line (see Fig.7.2) As TR is zero at zero level of output, the TR curve starts from the origin.

Table 7.3: TR and MR

(When Price remains Constant) Concept

Relationship between TR and Price line

When price remains constant at all the levels of output, then Price = AR = MR. Therefore, price line is the same as MR curve. Also, TR =  . So, the area under MR curve or price line will be equal to TR. In Fig. 7.3, TR at MR level of output = OP x OQ = Area under price line. Concept

Relationship between AR and MR (When Price Falls with rise in output)

When firms can increase their volume of sales only by decreasing the price, then AR falls with increase in sale. It means, revenue from every additional unit (i.e. MR) will be less than AR. As a result, both AR and MR curves slope downwards from left to right. This relationship can be better understood through Table 7.4 and Fig. 7.4: In Table 7.4, both MR and AR fall with increase in output. However, fall in MR is double than that in AR, i.e., MR falls at a rate which is twice the rate of fall in AR. As a result, MR curve is steeper than the AR curve because MR is limited to one unit, whereas, AR is derived by all the units. It leads to comparatively lesser fall in AR than fall in MR.

It must be noted that MR can fall to zero and can even become negative However, AR can be neither zero nor negative as TR it is always positive

Concept General Relationship Between AR and MR

The relationship between AR and MR depends on whether the price remains same or falls with rise in output. However, if nothing is mentioned about the nature of price with rise in output, then the following general relation exists between AR and MR:

1. AR increases as long as MR is higher than AR (or when MR > AR, AR increases).
2. AR is maximum and constant when MR is equal to AR (or when MR = AR, AR is maximum).
3. AR falls when MR is less than AR (or when MR < AR>

It must be noted that specific relationship between AR and MR depends upon the relation of price with output, Le, whether price remains same or varies inversely with output.

Concept

AR and MR Curves under Monopoly and Monopolistic Competition

Both, Monopoly and Monopolistic Competition fall under the category of Imperfect Competition. Therefore, AR and MR curves slope downwards as more units can be sold only by reducing the price. However, there is one major difference between AR and MR curves of monopoly and monopolistic competition.

Under monopolistic competition, the AR and MR curves are more elastic as compared to those of Monopoly. It happens because of the presence of close substitutes under monopolistic competition and absence of close substitutes under monopoly. So, when price of a commodity is increased in both the markets, then proportionate fail in demand under monopoly is less than proportionate fall in demand under monopolistic competition. As seen in the diagrams, AR and MR curves under monopolistic competition (Fig. 7.7) are more elastic as compared to the AR and MR curves under monopoly (Fig. 7.5). This concept is discussed in detail in Chapter 10.

Concept

Relationship between TR and MR (When Price Falls with rise in output)

When more of output can be sold only by lowering the price, then revenue from every additional unit (i.e. MR) will fall MR is the addition to TR when one more unit of output is sold. So, TR will increase when MR is positive, TR will fall when MR is negative and TR will be maximum when MR is zero. This relationship can be better understood with the help of Table 75 and Fig. 7.8:

Table 7.5: TR and MR (When Price Falls with rise in output) In Fig. 7.8, the TR curve rises as long as MR is positive. It reaches its highest point (point A) when MR is zero (point B) and it starts declining when MR becomes negative.

The relationship can be summed up as under:

1. As long as MR is positive, TR increases (or when TR rises, MR is positive).
2. When MR is zero, TR is at its maximum point (or when TR is maximum, MR is zero).
3. When MR becomes negative, TR starts falling (or when TR falls, MR is negative). Concept

Some Important Observations

1. Zero and Negative MR: MR can be zero and even negative when price falls with rise in output.
• MR can be zero when TR remains same with rise in output.
• MR can be negative when TR falls with rise in output.

However, MR cannot be zero or negative when price remains constant at all levels of output

1. can be calculated by adding up revenue realised from sale of every additional unit, i.e., TR = MR1+ MR₂ +…. + MRn = But. TC is the sum total of TFC and TVC. Since MC is not affected by TFC, TC cannot be calculated as the summation of MC.

Solved Practicals

Example 2. Calculate TR and AR from the following data: Example 15. Calculate TR, ART and MR from the following data: Note: MR has been calculated in the revere order, i.e., from bottom to top.

MR is calculated after dividing change in TR by 10 units as units sold are given at the gap of 10 units.

Example 17. Suppose, a book seller can sell 10 books at the price of ₹200 per book. His marginal revenue (MR) from the 11th book is ₹255. At what price did he sell the 11th book?

Solution:

TR of 10 books = 200 × 10 = ₹2,000 and MR of 11th book = ₹255

TR of 11 books = ₹2,000 + ₹255 = ₹2,255

Prince (AR) of 11th book = TR of 11 books 11 = 2,255 11 = ₹205

Ans. Price of 11th book = ₹205

Example 18. When output increases from 50 units to 70 units, TR increases from ₹4,000 to ₹5,000. Calculate MR.

Solution: Ans. MR = ₹50