The commodities, which are produced by the producer are offered for sale at a particular price with a certain percentage of profit added to it. Thus the amount of money, which the producer gets out of the sale of his products, is referred to as Revenue.
Revenue also means sale receipts. Revenue is nothing but the price multiplied by the number of units of commodity offered for sale. The total amount of money received by the producer when he offers his commodities for sale is known as total revenue.
8.1. TOTAL REVENUE
Total revenue is the total sale receipts of the output produced over a given period of time, total revenue depends on two factors, i.e., the price of the product and quantity of the product. In symbolic terms: Total revenue = price ××××× quantity sold.
For example, when a producer sells 50 units of the product, the price of each being 15 per unit. The total revenue is 50 × 15 = 750
8.2. AVERAGE REVENUE
Average revenue is total revenue divided by the number of units sold. Revenue obtained per unit of output sold is also termed average revenue.
AR TR
= Q Where AR = Average revenue
TR = Total revenue
Q = Quantity of the commodity sold.
For instance if TR is Rs. 10000 and units sold is 200 units.
Average revenue = Rs. 10000/200
= Rs. 50
By definition average revenue is the price. Price of a commodity is always per unit. Thus sales per units is also called average revenue.
AR = TR / Q, since TR = P ××××× Q As AR = P ××××× Q / Q
Thus AR = P
8.3. MARGINAL REVENUE
Marginal revenue is the change in total revenue resulting from an increase in sale by an additional unit of the product at a point of time. It can also be said that the addition made to the total revenue by selling one more unit of the commodity.
It can also be expressed that the marginal revenue is the addition made to the total revenue by selling 'n' units of a product instead of 'n – 1', where 'n' is any given number, per period of time.
MRn = TRn – TRn–1
Where MRn = marginal revenue of the out put sold.
TRn = Total revenue of the out put sold.
TRn - 1= Total revenue earned by selling n – 1 units per period of time.
Example: The producer is selling 200 units of the commodity and his total revenue is Rs. 2000. If he were to sell 205 units of commodity. His total revenue would Rs. 2100. Hence his marginal revenue is Rs. 2000 – Rs. 2100 = Rs. 100.
Thus marginal revenue is also defined as the ratio of change in total revenue to a unit change in output sold.
It can also written as MR dTR
= dQ
The concept of marginal revenue is of great significance to the producer, as it helps him to find the additional profit obtained at a point of time. It denotes the rate of change in total revenue as the sale of output change per unit.
8.4. RELATIONSHIP BETWEEN PRICE AND REVENUE UNDER PERFECT COMPETITION
In perfect competition, the firm cannot influence the market price, infact the firm is a price taker. Hence the total revenue of the firm increases proportionately with the output. When the total revenue increases in direct proportion, the average revenue also remains constant, this is because the price is not affected by the output and what ever is produced has to be sold at the market price. Since the market price is constant without any variation, the marginal revenue and the average revenue will be equal and constant. In such cases the marginal revenue will be a parallel straight line to the x axis.
No. of Average revenue Total revenue Marginal revenue Units sold AR = price
1 5 5 5
2 5 10 5
3 5 15 5
4 5 20 5
5 5 25 5
6 5 30 5
In the above column 2 shows that price and AR are equal and constant. The total revenue proportionately varies with the output.
Thus the marginal revenue becomes equal to the average revenue and price.
Diagrammatic representation
In the above figure revenue is measured on the y axis and output on the x axis. In case of the firm operating under conditions of perfect competition, its average, marginal revenue for one identical curve which is parallel to the x axis. The TR curve moves upward to the right, but its slope is constantly positive at 45° level indicating that revenue increases in direct proportion to the output.
Under Imperfect Competition
Under imperfect competition, whether it is monopoly, monopo- listic competition or oligopoly, the average revenue curve slope downwards. It is also the demand curve of the firm. Under imperfect competition, a firm can sell larger quantities only when it reduces the price. When the output is increased, the price has to be reduced. Hence the average curve is a declining curve, and likewise the marginal revenue also slope downwards.
No of units sold Price AR TR MR
1 10 10 10
2 9 18 8
3 8 24 6
4 7 28 4
5 6 30 2
6 5 30 0
The schedule explains the movement of the average revenue, as the units keep increasing the price of the commodity gradually decreases, the total revenue increases, but at a diminishing rate.
The marginal revenue also decreases and gradually reaches a zero level.
The figure above illustrates the movement of the AR and TR curves. The curves show that AR and MR are declining. The MR curve lies below the AR curve. Since the value of the marginal revenue diminishes faster than the average revenue, it is seen that the marginal curve slopes downwards and falls below the average revenue curve.
The average revenue and the marginal revenue curves need not be a straight line. They may either be convex or concave. But in all cases, the MR curve lies below the AR curve.
The revenue analysis helps in understanding how the revenue is calculated. It also states how the firms should produce the commodity and fix its price under the varied competitive situation.
In relating these concepts to the hotel industry, revenue analysis states how the industry while offering its various services — be it providing food, accommodation and others should react under different competitive situations.
MODEL QUESTIONS Short Questions
1. Explain the concept of revenue.
2. How is the average revenue calculated?
3. Find the difference between the total revenue and marginal revenue.
4. Explain the behaviour of the average revenue under imperfect competition.