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Different Types of Revenue Curves

1) Total revenue, average revenue, and marginal revenue are three types of revenue curves. Total revenue is the total earnings from sales, average revenue is revenue per unit, and marginal revenue is the change in total revenue from one additional unit. 2) Under perfect competition, the revenue curves are horizontal lines because price is determined by the intersection of demand and supply and remains constant at different output levels. Average revenue and price are equal, and marginal revenue coincides with average revenue since additional units are sold at the same price. 3) Under imperfect competition or monopoly, the average and marginal revenue curves slope downward as additional units are sold at lower prices. Marginal revenue lies below the average revenue curve because additional sales

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2K views9 pages

Different Types of Revenue Curves

1) Total revenue, average revenue, and marginal revenue are three types of revenue curves. Total revenue is the total earnings from sales, average revenue is revenue per unit, and marginal revenue is the change in total revenue from one additional unit. 2) Under perfect competition, the revenue curves are horizontal lines because price is determined by the intersection of demand and supply and remains constant at different output levels. Average revenue and price are equal, and marginal revenue coincides with average revenue since additional units are sold at the same price. 3) Under imperfect competition or monopoly, the average and marginal revenue curves slope downward as additional units are sold at lower prices. Marginal revenue lies below the average revenue curve because additional sales

Uploaded by

binod
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© © All Rights Reserved
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Different Types of Revenue Curves

1- Total Revenue ( TR)


2- Average Revenue (AR)
3- Marginal Revenue ( MR)
1) Total revenue is defined as the total earnings that firm
receives by the sales of product at certain period of time. It
is also defined as the sum of all marginal revenue.
TR = P*Q
2 ) AR is defined as the per unit revenue that firm earn from the
single unit of product.
AR = TR/Q
3) Marginal revenue is the change in total revenue due to sale of
one more unit of product.
MR = TRn - TRn-1
Derivation of Revenue Curve Under
Different Market
• Revenue curve in perfect competition market.
- Under the perfect competition there are large
number of buyers and sellers producing the
homogenous product with uniform price. In the
perfect competition market firms are price taker
and industry are price makers.
- The price remains constant due to same price at
different level of output. The price is determined
by the intersection between demand and supply.
Units Price TR AR MR
10 100 1000 100
20 100 2000 100 100
30 100 3000 100 100
Derivation of revenue curve under imperfect competition or
monopoly
• Under monopoly market there is single seller and large number of buyers
with no close substitute goods and barrier to entry of new firm. Firm itself
a ‘price makers’.
• In monopoly market both AR and MR are downward sloped line.

Units Price TR AR MR
1 10 10 10 10
2 9 18 9 8
3 8 24 8 6
4 7 28 7 4
5 6 30 6 2
6 5 30 5 0
7 4 28 4 -2
Relation between AR and MR under perfect
competition
Firms are price takers
only. AR and price
becomes same. MR
coincides with AR because
additional units are sold
at same price.

=P
Relation between AR and MR under perfect
competition
Firms are price takers
only. AR and price
becomes same. MR
coincides with AR because
additional units are sold
at same price.

=P
Relation between AR and MR under
imperfect market
• Both AR and MR declines with increase in the units of sales
• MR lies below the AR because the additional sales earn less
than average revenue.
1) When both AR and MR curves are straight line

When AR and MR are


straight line the MR
passes through the middle
of perpendicular line PW (
drawn from Y axis to AR)
When both AR and MR are convex and concave to
origin

When both are convex MR passes to the left of middle point


of perpendicular line AC and when both are concave MR
passes to the right of middle point of perpendicular line AC.

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