Types/Kinds of Revenue:
We have discussed earlier the various types of costs of a firm. Now the discussion will centre round the various types of revenue of a firm.
Definition of Revenue:
By 'revenue' of a firm is meant the total sale proceeds or the total receipts of a firm from the sale of the output.
The various kinds of revenue will be discussed here under three heads:
(i) Total Revenue, (ii) Marginal Revenue, (iii) Average Revenue.
(i) Total Revenue (TR):
Definition:
By 'total revenue' of a firm is meant the total amount of sale proceeds or the total receipts of the firm.
Example:
If a firm producing cloth sells one hundred meters of cloth in the market at $4 per meter, the sale proceeds or the receipts of the firm win be $400. This total sale proceed which a firm has received by selling 100 meters of cloth is called its total revenue. The total revenue varies with the sales of a firm.
Formula:
Total Revenue = Price x Quantity Sold
TR = P.q
Here:
P means price.
q means quantity.
TR means total revenue.
TR = 4 x 100
TR = $400
(ii) Marginal Revenue (MR):
Definition:
Marginal revenue is the addition made to the total revenue by a one unit increase in the volume of sales by the firm in the market. It can also called as the net revenue earned by selling on additional unit of output.
Example:
For example, if a firm sells 100 meters of cloth at $4 per meters, the total revenue of the firm is $400. If it increases the volume of sale from 100 meters to 101 meters, i.e., by one meter, the total revenue of the firm goes up to $404. The addition of $4 which has taken place in the total revenue by a one unit increase in the rate of sales per period of time is known as marginal revenue. MR can be expressed as follows.
Formula:
MR = ΔTR
Δq
(iii) Average Revenue (ARABI):
Definition:
Average revenue is revenue earned per unit of output. Average revenue is obtained by dividing the total revenue by the number of units sold in the market.
Example:
For example, a firm sells 200 meters of cloth for $600, then the average, revenue will be 600 / 200 = $3 only. Average revenue represents the average sale price per unit of the commodity. Average revenue curve can also be called demand curve.
Formula:
Average Revenue = Total Revenue
Total Output Sold
AR = TR
q
Revenue Curves of an Individual Firm Under Perfect Competition:
While discussing the assumptions of perfect competition, we have stated that in a perfect competition, the number of buyers and sellers is so large that an individual buyer or an individual seller cannot influence the market price.
A firm has to sell its products at the market price prevailing in the market. The buyers have also perfect knowledge of the quality and prices of the commodities which they wish to purchase. Similarly, a factor knows the reward which is paid to the similar factor in the country. In addition to these, the factors of production are perfectly mobile. They can freely move from one place to another place, from one occupation to another occupation, and no artificial barriers are imposed upon them by the state. The sellers sell identical and homogeneous goods.
Under the conditions stated above, there will be one price for the identical goods in all parts of the market. If any seller wishes to sell its goods at a price lower than the market price, its goods will be sold in no time as all the buyers have perfect knowledge of the market. If he keeps the price higher than the market price, the goods will not be sold. The seller in order to get the maximum profit will have to sell its total output at the prevailing market price as is shown in the two figs. given below:
Diagram/Figure:
In the fig. (14.1) markets demand and supply curves intersect at point K. KL, i.e. $5 is the market price.
In Fig. (14.2) DD is the demand curve which an individual firm has to face. A firm whether it produces 5 units or 50 units has to sell its product at the prevailing market price, i.e., at $5. If at any time the aggregate demand rises, and the price settles at PR (i.e., $8), then an individual seller can sell its products at $8. He will face the new demand curve D1 D1 as is shown in fig. (14.2).
Under perfect competition, the additional output is sold at the price at which, the first unit is sold. The average revenue curve is, therefore, always equal to marginal revenue and so both the curves AR and MR coincide.
For instance, when the market prices of a commodity is $5 per unit, the firm sells 10 units. The total revenue of the firm is $50. If it wishes to sell 11 units, an individual firm cannot alter the market price. So it has to sell the additional units also at $5. The total revenue of the firm by selling 11 units will be $5. The addition made to the total revenue by selling one more unit, i.e.. MR is $5. The average revenue is also found by dividing the total revenue by the number of goods sold $( 50 / 10 = 5, 55 / 11 = 5, 60 / 12 = 5). We therefore, find that in perfect competition marginal revenue, average revenue and price are the same. So these curves also coincide as is illustrated in the schedule and diagram.
Schedule:
Units
|
Price Per Unit ($)
|
Total Revenue ($)
|
Marginal ($)
|
Average Revenue ($)
|
10
|
5
|
50
|
5
|
5
|
11
|
5
|
55
|
5
|
5
|
12
|
5
|
60
|
5
|
5
|
13
|
5
|
65
|
5
|
5
|
14
|
5
|
70
|
5
|
5
|
15
|
5
|
75
|
5
|
5
|
16
|
5
|
80
|
5
|
5
|
The demand curve which a firm has to face in a perfect competitive market is a horizontal straight line parallel to the quantity axis. The MR and AR curves coincide with the price line DD/. Here MR = AR = Price as is shown in figure 14.3.
Revenue Curve of an Individual Firm Under Imperfect Competition:
Under imperfect competition, whether it may take the form of monopoly, duopoly or oligopoly, the demand curve facing the firm is negatively inclined or we can say its slopes downward from left to right. This means that a firm can affect the market price and can sell more goods at lower prices and less at a higher price.
Under imperfect competition, the behavior of MR curve is that it lies below the AR curve. As production expands, the distance between the two curves increases. The AR line and the price line is the same as is clear from the schedule given below:
Schedule:
| Units Sold | Price ($) | Total Revenue ($) | Marginal Revenue ($) | Average Revenue ($) |
| 1 | 15 | 15 | 15 | 15 |
| 2 | 14 | 28 | 13 | 14 |
| 3 | 12 | 36 | 8 | 12 |
| 4 | 9 | 36 | 0 | 9 |
| 5 | 7 | 35 | -1 | 7 |
| 6 | 5 | 30 | -5 | 5 |
Diagram/Figure:
lt is clear from the above figure (14.4) that average revenue curve and marginal revenue curve both have a negative slope. MR curve lies below the AR curve because the output is solid at the falling prices.
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