this would be helpful for KU students

1. REVENUE

2. In This Lecture…
 Concepts of Revenue: Total,
Average and Marginal
Revenues
 TR, AR and MR in Perfect
Competition and Imperfect
Competitions
 Concepts and Conditions
for Profit Maximization of
Firms

3. Revenue
Revenue is the money payment received
from the sale of a commodity.

4. Types of Revenue
1. Total Revenue
2. Average Revenue
3. Marginal Revenue

5. Total Revenue
TR is defined as the total or aggregate of
proceeds to the firm from the sale of a
commodity.
Symbolically,
TR = P X Q
P = Price
Q = Quantity

6. Average Revenue
Average Revenue is the revenue per unit
of output sold.
Symbolically,
AR = TR
Q
Or, AR = P X Q
Q
Or, AR = P
AR is always identical with the price.

7. Marginal Revenue
Marginal Revenue is the revenue received by
selling one extra unit of output.
OR
Marginal Revenue is the addition made to total
revenue when one more unit of output is sold.
MR = Change in Total Revenue
Change in Quantity Sold
MR = ΔTR
ΔQ
Also, MR n = TR n – TR n-1

8. Firm’s Revenue curves under
Perfect Competition
 It is a market situation where a firm is a price
taker. There are so many buyers and sellers in
the market that no individual buyer or seller
can influence the price of a commodity. Any
variation in the output supplied by a single
firm will not affect the total output of the
industry. No individual buyer can influence
the price of the commodity by his decision to
vary the amount that he would like to buy.
 Price in perfect competition market is
determined by the free play of the market
demand and supply curve.

9. TR, AR, MR schedule under
Perfect Competition
Units sold Price (P)
1
2
3
4
5
 Here,
10
10
10
10
10
AR=P=d
AR=MR
TR
10
20
30
40
50
AR
10
10
10
10
10
MR
10
10
10
10
10

10. Graphical presentation of TR, AR,
MR under Perfect Competition
Revenue
50
TR
40
30
20
10
0
P=AR=MR=d
1
2
3
4
5
Quantity

11. Relationship between TR, AR,
MR under Perfect Competition
 TR is a straight positively sloping line from the
origin.
 TR increases in the same proportion as
increase in output sold.
 AR is horizontal line parallel to x-axis. It
coincides with the price line or the demand
curve i.e. AR = P = d
 MR is also a horizontal line parallel to x-axis.
Since AR is constant MR is also constant. MR
curve coincides with the AR curve such that
P= d = AR = MR

12. Price Line and Total Revenue
under Perfect Competition
Revenue
P
0
A
X
P1
Quantity
 TR is equal to the area under the price line.
 TR = price x quantity
= OP x OX
= OPAX

13. Firm’s Revenue curves under
Imperfect Competition
 It is a market situation where a firm is a price
maker. In such a market a firm is able to sell
more only by reducing the price of the
product.
 Price in imperfect competition market is
determined by the firms itself.

14. TR, AR, MR schedule under
Imperfect Competition
Units sold Price (P)
1
2
3
4
5
6
7
 Here,
10
9
8
7
6
5
4
AR=P=d
AR≠MR
TR
AR
MR
10
18
24
28
30
30
28
10
9
8
7
6
5
4
10
8
6
4
2
0
-2

15. Graphical presentation of TR, AR,
MR under Imperfect Competition
TR
TR is maximum
TR
O
AR/MR
Q
MR=0
O
MR
AR
Q

16. Relationship between TR, AR,
MR under Imperfect Competition
When TR increases at a decreasing rate,
MR is declining but has positive value.
TR is maximum when MR = 0
TR starts to decline when MR is negative.
The rate of fall in MR is twice to that of
AR.

17. Profit Maximization for Firms
A producer is said to be in equilibrium
when he produces the level of output at
which his profits are maximum.
It is a situation of profit maximization.

18. Profit Maximization Conditions
for Firms
A primary objective of a producer is to
earn maximum profits.
Profits is the difference between total
revenue and total cost.
π = TR - TC
Producer is in equilibrium at that level of
output at which he is earning maximum
profits i.e. the difference between TR and
TC is maximum.
The producer is in a “state of rest”.

19. Profit Maximization Conditions
for Firms with TC and TR Curves
Profits are maximum where the
following two conditions are satisfied.
1. The vertical distance between TR and
TC is maximum.
2. Profits fall if one more unit of output
is produced.
Break-even Point : It is the point where
TR=TC or AR=AC; profits are zero and
losses are zero. This is also known as

20. Profit Maximization Conditions
for Firms with TC and TR Curves
TC
TR / TC
TR
O
π
XA X
XB Output
π is maximum
At XA and XB π is zero. Noprofit-no-loss points
O
XA X
XB Output

21. Profit Maximization Conditions
for Firms with MR and MC Curves
Profits are maximum where the
following two conditions are satisfied.
1. MR=MC
2. MC curve must be rising

22. Profit Maximization Conditions
for Firms with MR and MC Curves
MC
MR / MC
MR
O
π
XA X
XB Output
π is maximum
At XA and XB π is zero. Noprofit-no-loss points
O
XA X
XB Output

23. Profit Maximization Conditions
for Firms with MR and MC Curves
MC
MR / MC
MR
O
π
XA X
XB Output
π is maximum
At XA and XB π is zero. Noprofit-no-loss points
O
XA X
XB Output

24. Profit Maximization Conditions for
Firms with TR / TC MR / MC Curves
TR/TC
TC
TR
O X1
X
X2 Output
X
X2 Output
π
O X1
MR/MC
MC
O X1
X
MR
X2 Output

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