Chapter Notes - Revenue Notes | Study Economics Class 11 - Commerce

REVENUE :: It is MONEY RECEIPT from sale of goods and services. It is also called Sale Proceed.

REVENUE AND PROFIT ARE DIFFERENT CONCEPT

Profit refers to excess of receipts from the sale of goods over the expenditure incurred on producing them

TOTAL REVENUE (TR ) :: It is total MONEY RECEIPT FROM SALE OF GIVEN QUANTITY OF OUTPUT.

⇒ It is thus SUM OF ALL SALES PROCEED. It is the same thing as the total expenditure by the buyers on purchase of the product of the firm.

For instance, if a firm sells 200 transistors @ Rs 150 per unit, its total revenue will be equal to Rs 30,000 (200 x 150).

⇒ Total Revenue is zero at zero level of output and hence it starts from origin and increases with increase in quantity sold.

MARGINAL REVENUE (MR) :: It is ADDITIONAL  RECEIPT from sale of additional unit of commodity

Example :: If 100 chairs are sold for Rs. 500 /- and 102 chairs are sold for Rs. 580/- then MR = 580-500/2 = Rs 40

AVERAGE REVENUE (AR) :: It is per unit of money received from sale of a commodity. It is same thing as price of the commodity

AR curve is named differently like demand curve, price curve or average revenue curve.

⇒ It is called DEMAND CURVE from consumer point of view since it indicatesquantity demanded by the buyers at different price and

⇒ It is called AVERAGE REVENUE CURVE from producer point of view becauseit indicates the average receipts (revenue or income) of the firm.

RELATIONSHIP BETWEEN MR AND TR

TR = Σ MR = MR₁ + MR₂ + MR₃ + ..............+ MR_N. This means that every positive additional adds to total revenue.

(1) TR is increasing at INCREASING RATE when MR is POSITIVE AND INCREASING

(2) TR is increasing at CONSTANT RATE when MR is POSITIVE AND CONSTANT

(3) TR increases at DIMINISHING RATE MR is POSITIVE BUT DECREASES 
(4) TR is MAXIMUM when MR is ZERO (i.e MR touches X-axis)
(5) TR FALLS when MR is NEGATIVE (i.e below X-axis)

NEGATIVE MR

POSSIBILITY :: YES, MR can be negative in case of monopoly or monopolistic competition where MR is decreasing but it cannot be negative under perfect competition where MR is constant and parallel to X -axis.  

⇒ It is negative when PROPORTIONATE REDUCTION IN PRICE (1/5 X 10 = 20%) is MORE THAN proportionate increase in quantity sold (1/6 X 10 =16.67%) which makes TR to fall

AR AND MR UNDER DIFFERENT MARKET SITUATIONS

(1) PERFECT COMPETITION { WHEN MORE IS SOLD AT SAME PRICE}

In this market situation there are
(a) large number of buyers and sellers and each having a minor share in total quantity brought and sold.
(b) Selling Homogenous goods i.e goods of same quality.
Example Stock Market

This MAKES PRICE OF GOOD FIXED as no seller can charge high price.Thus a firm or seller is price taker and sells each unit of output at same price, which makes Average revenue equal to Marginal revenue  Thus revenue from sale of every additional unit (MR) is equal to its Price (AR)

 ⇒ Always remember that when a firm is able to sell more output at the same price, then AR = MR at all levels of output , A s a result demand curve (AR curve) is PERFECTLY ELASTIC. THIS HORIZONTAL LINE IS ALSO KNOWN AS PRICE LINE

(2) IMPERFECT COMPETITION {WHEN MORE IS SOLD BY LOWERING THE PRICE}

(a) MONOPOLY :: It is a market situation in which there is a single firm selling the commodity and there are no close substitute of commodity.
For example :: Railways owned by GOI.

(B) MONOPOLISTIC :: It is a market situation which has element of both Perfect competition and Monopoly.It is a mid-way situation between Perfect competition and Monopoly. Thus there are few sellers selling differentiated product .
Example Cosmetic, Soap

In both Monopoly and monopolistic, TO SELL MORE  SELLER HAS TO REDUCE PRICE (AR) and we know that when AR is decreasing, MR decreases at a faster rate.

TR INITIALLY INCREASES AT DIMINISHES RATE AND REACHES MAXIMUM POINT, AND THEN DECLINES

When firm can increase their volume of sales only by decreasing the price, then AR falls with increase in sales.
It means , revenue from every additional unit (i.e MR) will be less than price (AR)
It must be noted that
(a) fall in MR is double than that in AR that is FALL IN MR IS TWICE THE RATE OF FALL IN AR

(b) It must be noted that MR can fall to zero and can even become negative. 
→ However AR can be neither zero nor negative asTR it is always positive

BASIC DIFFERENCE BETWEEN MONOPOLY AND MONOPOLISTIC DEMAND CURVE

In both the market AR is decreasing and MR is below it but in case of MONOPOLISTIC competition the demand curve (AR) CURVE IS MORE ELASTIC OR FLATTER due to
(a) availability of substitute goods
(b) more number of sellers

This makes consumer to respond more in case of any price change

RELATIONSHIP BETWEEN AR , MR AND TR

(1) TR = P (AR) x Q  or  TR = Σ MR  (2) MR = TR_n - TR_n-1 (3) AR = TR / Q

(4)  When AR IS INCREASING
→ MR is above  AR
→ TR increases at a increasing rate

⇒ This happens in case of SPECIAL SITUATION or in case of emergency

(5) When AR IS CONSTANT

→ MR is also constant and parallel to X- axis
→ TR increase at a Constant rate that is straight line from origin with constant slope

⇒ This happens in case of PERFECT COMPETITION

(6) When AR IS DECREASING

→ MR is  below AR 
→ TR increases at diminishing rate

⇒ This happens in case of IMPERFECT COMPETITION

(7) AR can never be zero but MR can be zero. TR reaches its maximum point 

(8) MR is negative, TR starts falling