Page 229 - DECO401_MICROECONOMIC_THEORY_ENGLISH

Microeconomic Theory

Notes (Here, MR = marginal amount; ∆ = change in; TR = total amount; Q = production or sales volume.
TR = n the units total income; TR = n – 1 the units total income, n is the number of units sold.)
n n–1
For example, if 4 items are sold then total revenue
is 28 and if 5 items are sold then total revenue is Revenue should not understood as profit. Revenue
increased by 30. So the marginal revenue of fifth means the income of producer by selling his items.
item would be 30 – 28 = 2. This can also be In contrast, profit is the difference between total
revenue and total cost.
described as rate of change in total revenue.

11.2 Concepts of Revenue Under Different Market Conditions

The nature of concept of revenue depends upon the nature of those market competitions where the
product is going to sell. Three market conditions are: (i) Perfect Competition; (ii) Monopoly and
(iii) Monopolistic Competition.

11.3 Concepts of Revenue Under Perfect Competition

Perfect competition is the state of market where there are lots of sellers and buyers of a unique product
and all sellers sell the product at a similar price. From Table 1 and Fig. 11.1, all 3 conceptions of
revenue in perfect competitions are described, means (i) Total Revenue; (ii) Average Revenue and
(iii) Marginal Revenue.

Self Assessment

Fill in the blanks:
1. The revenue of a firm is its ............... income.
2. The per unit of income by selling a product is .............. .
3. The average revenue means a product has .............. .
4. When demand of elasticity is unit then marginal revenue is .............. .

Table 1: Different Concepts of Revenue under Perfect Competition
Sold Quantity Total Revenue (in ) Average Revenue or Price (in ) Marginal Revenue (in )
TP
___

Q TR = AR × Q AR or P = MR = TRn – TR
Q n–1
1 5 5 5
2 10 5 5
3 15 5 5
4 20 5 5

(i) Total Revenue: From Table 1, it indicates that the price of product is stable in perfect competition,
so the total revenue increased at a stable rate. For example, on price 5, the total revenue of 2 units
is 10 and for 3 units it is 15. The total revenue is increasing by 5 constantly by selling per extra
unit.
(ii) Average Revenue: Table 1 makes it clear that full competition changes to the amount sold along
with the average price change proceeds or not. As per above table, it would be 5 either the firm
sells one unit or 4 units. The reason behind this is in perfect competition, the price of product is
determined by industry and firm can sell numerous quantity of that product.

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