Page 240 - DECO401_MICROECONOMIC_THEORY_ENGLISH

Unit-11: Concepts of Revenue

To use the elasticity of demand (which is infinity) in this equation - Notes
MR = AR = ( 1 – ) AR (1- 0) AR or Price
1 __

∞
(ii) When elasticity of demand is unitary, marginal revenue is zero.
)
e – 1 )
1 __

MR = AR ( d _____ AR = AR ( 1 –

e
e
d d
1 __

= AR ( 1 – ) = AR × (0) = 0
1
(iii) When elasticity of demand is greater than unitary (elastic demand) marginal revenue is positive.
(MR > 0)
For example, when e = 3; The marginal revenue (MR) is two – third of average revenue (AR).
d
)
2 __
1 __
1 __
2 __

MR = AR ( 1 – = AR ( 1 – ) = AR ( ) = AR

e
d 3 3 3
(iv) When elasticity of demand is less than unitary (inelastic demand), marginal revenue is negative.
(MR < 0)
1 __

For example, when E = and AR = 3, MR is positive.
2
1 __

)
1 __
1 __

MR = AR ( 1 – = 3 ( 1 – ) = 3 (1 – 2) = 3 (–1) = –3

e
d 2
MR = –3
11.9 Summary
· In general language, average revenue is nothing but per unit cost. So the meaning of product price
and average revenue is same. It means the average revenue is described as unit revenue of product.
11.10 Keywords
· Revenue: Total annual income of state.
· Average Revenue: Average income
· Marginal Revenue: Total income
11.11 Review Questions
1. What is income or revenue?
2. Define the concept of revenue in perfect competition.
3. What do you mean by elasticity of product demand?
4. Describe total revenue and elasticity of demand.
Answers: Self Assessment
1. Selling 2. Average Revenue 3. Price 4. Zero
5. (a) 6. (c) 7. (a) 8. (a)
9. False 10. True 11. True 12. True
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