1

Concept of Revenue
Treat the customer as an appreciating asset
Revenue is the total amount of money that flows into
the firm.
This can be from any source, including product
sales, government subsidies, venture capital and
personal funds.
Total Revenue:
Total revenue for a firm is the selling price times the
quantity sold.
TR = (P Q)
Where TR: Total Revenue
P: Price
Q: Quantity Sold
2
The total revenue curve can be shown as follows:
If the market demand is linear, the total
revenue curve will be a curve which initially slopes
upward, reaches the maximum point and then starts
declining.

TR
Output
TR
Q
1

3
Average Revenue:
Average revenue tells us how much revenue
a firm receives for the particular unit sold.
Average revenue is total revenue divided by
the quantity sold, which is equal to the price of
the product.
i.e. AR=P
AR = TR/q
Where, AR: Average revenue
TR: Total Revenue
q: quantity sold
4
Marginal Revenue:
Marginal revenue is the increase in the total
revenue received by a firm from selling extra
units of its output.
More specifically, marginal revenue is the
additional revenue that a firm receives from
putting one more unit of output in the market.
The price obviously, is the average revenue
that the seller receives.
The following table indicates how the TR, AR
and MR is calculated:
5
No. of Units
Sold (Q)
Price of the
Product (P)
Total Revenue
(P.Q)
Average
Revenue
(TR/q)
Marginal
Revenue
1 16 16 16 -
2 15 30 15 14
3 14 42 14 12
4 13 52 13 10
5 12 60 12 8
6 11 66 11 6
7 10 70 10 4
8 9 72 9 2
9 8 72 8 0
10 7 70 7 -2

6
Following the above table, the average revenue
and the marginal revenue curves can be derived as
follows

Y
X
O
m
Revenue
Quantity
AR
MR
7
However, in the situation of perfect competition,
where the average revenue or price is constant due
to the market intervention, the marginal revenue
will also be constant.
If the price or average revenue remains the same,
when more and more units are sold, the marginal
revenue will be equal to average revenue.
This is so because when one more unit is sold and
the price does not fall, the addition made to the total
revenue by that unit will be equal to the price at
which it is sold since no loss in revenue is incurred
on the previous units in this case.
This will be better understood by the following table
8
No. of Units Sold
(Q)
Price of the
Product (P) or
Average Revenue
(AR)
Total Revenue
(P.Q)
Marginal Revenue
(MR)
1 16 16 -
2 16 32 16
3 16 48 16
4 16 64 16
5 16 80 16
6 16 96 16
7 16 112 16
8 16 128 16
9 16 144 16
10 16 160 16

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The case of perfect competition when for an
individual firm average revenue (or price) remains
constant and marginal revenue is equal to average
revenue can be shown by the following diagram:

O
AR & MR
Quantity
AR=MR
P
10


From the diagram it is clear that the average
revenue curve is a horizontal strait line.
Horizontal strait line average revenue curve
indicates that price or average revenue
remains the same at OP level when quantity
sold is increased.
Marginal revenue curve coincides with the
average revenue curve since marginal
revenue is equal to the average revenue.
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Equilibrium of a Firm:
Equilibrium is a situation which is very essential to the firm.
Any effort to sell at a price higher than the equilibrium price
would be frustrated by the competitors, while no rational firm
like to sell at a price lower than what it could get.
If a firm wants to maximize his profit then first he should
determine its price.
The rational behind the theory is: if the production and sale of
an additional unit of product adds more to revenues than to
costs, profit is increased and thus that unit should be
produced and sold.
If the additional unit of output involves larger costs than
revenues, it should not be produced.
More specifically, the firm continues to increase output until
the marginal revenue is larger than the marginal cost.
Therefore, a firm will be in equilibrium, when:

MR=MC