Revenue

Revenue• Producer/ seller wants to know the demand of the goods

• The revenue of a firm constitutes the receipts of money from the sale of goods and services over a given time period.

• Total revenue (TR).

This is the total receipts of money received by a firm from the sale of its good or service in a given time period.

TR = P × Q.

• Average revenue (AR).

The amount of money received, on average, for each good sold. Revenue earned per unit of outputAR = TR /QAR = P × Q / Q = P

i.e AR = P

Is the AR different from Price?

– AR =P , seller sells various units of a product at the same price

– AR ≠ P, Seller sells different units of a product at different price

• In actual life : seller sells various units of a product at the same price

“So in economics AR and Price are synonyms”

As Buyers demand curve represents graphically the quantities demanded or purchased by the buyer at various prices of the good, So it shows the AR of the firm(various amount of goods sold by the seller)

Price paid by the buyer is the revenue for seller

DEMAND CURVE IS SAME AS AR CURVE

Marginal Revenue

• Marginal cost is the cost of producing one more unit of output.

• Marginal revenue is the revenue received from selling one more unit of output.

• It is the extra revenue at the margin (i.e. by selling the marginal unit of output).

• It is difference in total revenue in increasing sales from

n-1 units to n units

• MRn = TRn – TRn-1

• MR = ∆TR / ∆Q

Average revenue: As the quantity sold (or demanded) rises. Remember also that AR = price. So in essence as the price falls, demand rises.

Total Revenue: TR = P × Q , As the Demand increases so does the TR.

Marginal Revenue:Keeps on falling down with increase in demand as the price keeps on falling. But MR falls at a much higher rate than AR

Graphical Representation of TR/ AR & MR Curve

1) When AR is a downward sloping curve

Graphical Representation of TR/ AR & MR Curve

2) When the AR curve is a flat demand curve

Equilibrium of The Firm

• With the given cost and revenue schedule the firm needs to find the level of output that Maximises Profit.

• A firm aims is maximising profit

• Total profit = total revenue - total cost (TR − TC).

• Two methods– Total Revenue and Total Cost method– Marginal Revenue and Marginal cost method

.

a) TR and TC Method

• Graphically it is the maximum distance between the TR and TC curve

Q P TR TFC TVC TC Total Profit

0 110 0 100 0 100 -100

1 110 110 100 55.70 155 -457

2 110 220 100 105.6 205.6 -14.4

3 110 330 100 153.9 253.9 76.1

4 110 440 100 204.8 304.8 135.2

5 110 550 100 262.5 362.5 187.5

6 110 660 100 331.2 431.2 228.8

7 110 770 100 415.1 515.1 254.9

8 110 880 100 518.4 618.4 261.6

9 110 990 100 645.3 745.3 244.7

10 110 1100 100 800 900 200

11 110 1210 100 986.7 1086 123

A firm actually makes a loss at low levels of output.It only starts to make a profit after the level of output rises above Q1 (which is a break-even level of output). The distance between the total revenue curve and the total cost curve is greatest at Qmax, so this is the profit maximising level of output. Profits fall after this point, reaching another break-even level of output at Q2, after which point the firm is again making a loss.

b) MR – MC Approach

• The firm will be equilibrium position when it is producing the amount of output at which MC = MR

• A firm will go on expanding its level of output till its MR > MC

• But with the law of diminishing returns , the firm MC begins to rise

• A firm will increase its total profit till its – MR = MC – MC curve must cut MR curve from below at the point

of equilibrium

– Marginal Profit = MR – MC touches Zero (not negative)– i.e the firm can make no more additional profit and

therefore it should not produce at a higher level of output.

Q P =MR AFC AVC AC MC Marginal

Profit

0 110

1 110 100 55.70 155.7 55.7 54.3

2 110 50 52.80 102.8 49.9 60.1

3 110 33.33 51.30 84.3 48.3 61.7

4 110 25 51.20 76.2 50.9 59.1

5 110 20 52.50 72.5 57.7 52.3

6 110 16.67 55.20 71.8 68.7 41.3

7 110 14.29 59.30 73.5 83.9 26.1

8 110 12.50 64.80 77.3 103.3 6.7

9 110 11.11 71.70 82.8 126.9 -16.9

10 110 10 80 90 154.7 -44.7

11 110 9.09 89.7 98.7 186.7 -76.7

Graph of MR -MC

• Profit maximisation, is where MC = MR.

• At Q3, MR > MC. This means that the extra revenue gained through the sale of that unit is greater than the cost of making it. The firm is making a profit on that unit. But the firm is not maximising total profit.

• At Q4? MR is still greater than MC, the firm again makes profit on that unit.

• At Q5, , MR < MC. The firm is making a loss on that unit. This does not necessarily mean that the firm is making a loss overall (what about all the profit made up to Qmax?),

• At Qmax, MR = MCProfit is Maximised

• Even if the firm makes just one extra unit, where MC is a little bit bigger than MR, the overall profit will fall, however small.

Break – Even Points

• Q1 and Q2 are the Break- Even levels of output.

where profit = 0 as TR = TC

• Qmax is the profit maximising level of output.

The profit curve is at its highest, the gap between TR and TC is greatest and MC = MR

• Profits are no longer maximised if production rises above Qmax, total profit is still positive, even though it is falling.