Thursday, May 20, 2010

Revenue curves

Revenue curves
There are 2 types of revenue curves :
  1. Concept of total revenue,average revenue and marginal revenue :A firm earns revenue by selling its products.The revenue earned by it is divided into 3 parts-total revenue and marginal revenue.
  • Total revenue :The total earned by a firm by selling its product is called total revenue.The total revenue is obtained by multiplying price per unit of a commodity by the total quality sold.Hence,it is expressed as ,
Where TR=total revenue,P=price and Q=quality.As for average example,if 10 units of a commodity are sold at price rs.10.per unit,TR=rs.10*10=rs100.
  • Average revenue :The average revenue is the price per unit of a commodity.The average revenue is obtained by dividing total revenue by the total quality sold.Hence,it is expressed as.
Where AR=average revenue.As for example,if total revenue is Rs.100 and total quantity sold is 10 units,
The question crops up whether the average revenue and price are same thing?The answer is that if different units are sold at the same price,average revenue and price are equal.But if different units are sold at different prices,the average revenue and price are not equal.However in real life,different units are sold at the same price.Hence,in economics average revenue is synonymous with price.It is to be noted that the average revenue curve of a firm is the demand curve of a consumer.Since the demand curve shows the quantities demanded at different prices,it also shows average revenue of a firm.Because ,the price paid by a consumer is the revenue from a seller's viewpoint.
  • Marginal revenue :The marginal revenue is the addition made to total revenue while selling one more unit.According to C.E.Ferguson "Marginal revenue is the change in total revenue associated with the change in one unit of output."It is expressed as.
2.Derivation of AR and MR curves from TR curve:The average revenue and marginal revenue curves can be obtained from total revenue curve.The process is little bit different in perfect competition and monopoly or imperfect competition.Because price remains constant under perfect competition.On the other hand,price is reduced to sell more quantities under monopoly.
3.Revenue curves under perfect competition :The demand curve of a firm under perfect competition is perfectly elastic.The price is beyond the control of a firm.Because price is determined by the industry as a whole.The average revenue or price thus remains constant.If different units are sold at same price,marginal revenue equals price.