Revenue is the total amount of money a firm receives from selling goods or services. Total revenue is the total receipts over a period of time, which equals price multiplied by quantity sold. Average revenue is total revenue divided by quantity and equals price, since firms typically sell units at a single price. Marginal revenue is the change in total revenue from selling one more unit. Firms aim to maximize profit by producing where marginal revenue equals marginal cost, the point of profit maximization. This occurs at the quantity where the distance between total revenue and total cost curves is greatest.

1. Revenue

2. 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 output
AR = TR /Q
AR = P × Q / Q = P
i.e
AR = P

3. 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

4. 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

5. 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

6. Graphical Representation of TR/
AR & MR Curve
1) When AR is a downward sloping curve

7. Graphical Representation of TR/
AR & MR Curve
2) When the AR curve is a flat demand curve

8. 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
.

9. 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

10. 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.

11. 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.

12. 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

13. Graph of MR -MC

14. •
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 = MC
Profit 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.

16. 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.