Presentation on Concepts of Revenue BCom II Business

Presentation on Concepts of Revenue BCom II Business Economics, Panjab University BY SHAH BANO PARVEEN Associate Professor in Economics, P. G. Govt. College, Sector-11, Chandigarh

Revenue AR=MR Output X Y Revenue Concepts of Revenue Y AR MR Output X

Concepts of Revenue Total Revenue Marginal Revenue Average Revenue

Concepts of Revenue defined: Total Revenue: Sum of all sale receipts or income of a firm. TR=Pх. Q where P stands for Price of the product & Q stands for Quantity n Marginal Revenue: Change in TR which results from the sale of one more or one less unit of output. ∆TR/ ∆Q or MR=TRn – TRn-1 n Average Revenue: Per unit revenue received from the sale of a commodity. AR=TR/Q=PQ/Q=P n

Relationship : AR and MR under Perfect Competition n Perfect Competition is a market situation where single price prevails and it has no tendency to change. n Since under Perfect Competition, price of commodity remains constant. Therefore AR curve of firm is parallel to X axis. n When AR is parallel to X axis, MR = AR. Meaning that MR is also parallel to X axis.

Table: AR, MR under Perfect Competition Units of Total Commodity Revenue Price= Average Revenue Marginal Revenue 1 5 5 5 2 10 5 5 3 15 5 5 4 20 5 5 5 25 5 5

TR, AR and MR curves under Perfect Competition Y Y TR Revenue 0 AR=MR P Output X O Output X

Relationship : AR and MR under Imperfect Competition n imperfect competition is a market situation where the firm is price maker and it knows that it must reduce price if it wants to sell more. Therefore, AR curve of the firm is downward sloping. This leads to downward slope of MR curve also. But the slope of MR curve is double the slope of AR curve.

AR and MR curves under Monopoly Output 1 Price=AR 10 Total Revenue Marginal Revenue 10 10 (10 -0=10) 2 9. 5 19 9 (19 -10=9) 3 9 27 8 (27 -19=8) 4 8. 5 34 7 (34 -27=7)

AR and MR curves under Monopoly Y R e v e n u e MR 0 AR X Output

AR and MR under Imperfect Competition n 1. 2. 3. 4. Following results emerge: Both AR and MR are derived from TR AR and MR are both downward sloping. Slope of MR is double the slope of AR AR is always positive but same is not true about MR as MR may be positive, zero or even negative

Relationship: AR, MR and Elasticity n n n In case of monopoly, AR & MR curves slope downward. At different points of demand curve, elasticity of demand is different. Before point A, Elasticity of Demand ‘E’>1 meaning that firm must reduce price if it wants to sell more. Here we find MR>0 At point A, Elasticity of Demand ‘E’=1 implying that MR =0 meaning that if firm changes its price now, its total revenue will be same. After A, elasticity of demand ‘E’<1 meaning MR is negative. Concludingly, firm earns profit if it fixes higher price. E>1 R E V E N U E E=1 B E<1 AR A OUTPUT MR

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