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Unit-11: Concepts of Revenue

(iii) Marginal Revenue: From Table 1 it is clear that the marginal revenue of firm in perfect competition Notes
is stable (means 5) even it sells as much as products. In fact, the price or average revenue is stable,
so the marginal revenue is also stable because by selling per extra unit, the firm gets equal amount.
So in perfect competition, average revenue and marginal revenue are always same (AR = MR). To
get marginal revenue, we can divide the changes happened with total revenue (∆TR) by changes in
∆TR
sold quantity (∆Q) i.e., MR = ____ . From Table 1, it has been got that by selling 2nd unit, change in

∆Q
total revenue is 10 – 5 = 5 and the quantity of sold product has changed to 2 – 1 = 1 unit.
5 __
So the marginal revenue is Thus, the marginal revenue for the 3rd, 4th and other units would 5.

.
1
In Fig. 11.1 the conception of Total Revenue (TR), Average Revenue (AR) and Marginal Revenue (MR)
has been described.
Fig. 11.1

Revenue Curves Under Perfect Competition
Y
(A) Constant MR implies Y (B) Constant AR implies
that TR increases at Constant MR and both
a constant rate.
TR should be equal.
25
20
Revenue 15 Revenue 20
15
10
5 10 P AR=MR P
5
0 X 0
1 2 3 4 1 2 3 4 5 X
Output Output

In Fig. 11.1 (A) and (B) revenue is on axis OY while output is on axis OX. In Fig. 11.1 (A), TR curve is
total revenue curve. This is a straight line whose slope is upward. This proves that the total revenue is
increasing at a constant level. In Fig. 11.1 (B), the vertical line PP which is parallel to axis OX represents
both Average Revenue and Marginal Revenue. This indicates that AR is stable means equal to 5 and
AR = MR.

The marginal revenue is nothing but the difference between the total revenue by selling
one more or one less unit.

11.4 Concepts of Revenue Under Monopoly and Monopolistic

Competitions

The concept of revenue under monopoly and monopolistic competitions i.e. (i) Total Revenue,
(ii) Average Revenue and (iii) Marginal Revenue are described by Table 2 and Fig. 11.2.

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