Revenue

Question 1

What is revenue?

Answer 1

Revenue is the total amount of money recieved with the sale of a commodity. It is also known as sale proceeds.

Question 2

What is TR?

Answer 2

TR refers to the total amount of money recieved with the sale of output.

Question 3

What is MR?

Answer 3

MR is the change in total revenue due to an additional unit of the commodity sold.

MR = #TR/#Units

MR = TRn - TRn-1

Question 4

What is AR?

Answer 4

AR refers to the per-unit reciet with the sale of output.

AR = TR/Units Sold (Quantity)

Question 5

Prove that AR is equal to Price.

Answer 5

AR = TR/Q = (P*Q)/Q = P

Hence, AR = P

(Average Revenue = Total Revenue/Quantity = Price * Quantity / Quantity = Price)

Question 6

Explain the relationship between TR and MR

Answer 6

• Under Perfect Competition

TR increases at a constant rate and MR remains constant.

• Under Imperfect Competition

1. When TR increases at a diminishing rate, MR decreases
2. When TR is maximum, MR will be 0
3. When TR falls, MR becomes negative

Question 7

Explain the relationship between AR and MR curves

Answer 7

1. Perfect Competition - Under perfect competition, AR = MR. This is because there are large number of buyers and sellers, and hence no individual firm can influence the price of the commodity. Further, firms sell homogenous product that is identical in terms of shape, size, colour etc., hence, no firm can charge higher price for similar product. (perfect subsitutes) Therefore, single uniform price prevails throughout the market. Hence, marginal revenue recieved with each successive sale of unit (MR) is the same as price (AR). Hence, AR = MR.

2. Monopolistic Competition - Under monopolistic competition, AR and MR curves are downward sloping and rate of fall of MR is more than the rate of fall of AR. This implies that in order to increase sales of the commodity, firms must lower down the price of commodity.

3. Monopoly - Under monopoly, AR and MR curves are downward sloping and rate of fall of MR is more than the rate of fall of AR. This implies that in order to increase sales of the commodity, firms must lower down the price of commodity. The AR and MR curves under monopoly will be less elastic or more steep as there is greater price variation. (just for understanding: since elasticity is #Q/#P and if #P becomes greater, elastcity becomes lesser, and hence the slope becomes steeper)