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
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
.
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.
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.
15.
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.
