Revenue
Total, average, and marginal revenue, and how AR-MR behaviour differs by market structure.
Definition
Revenue is the income a firm earns from the sale of a given quantity of output, measured as Total Revenue, Average Revenue, and Marginal Revenue.
Simple Explanation
Revenue is the money flowing in from sales — and how it behaves as you sell one more unit reveals how competitive your market is.
Detailed Explanation
Total Revenue (TR) = Price × Quantity sold. Average Revenue (AR) = TR/Q, which always equals price per unit — so the AR curve is identical to the firm's demand curve. Marginal Revenue (MR) is the change in TR from selling one additional unit.
Under perfect competition, a firm is a price taker, so price (and AR) stays constant regardless of quantity sold — making AR = MR a horizontal straight line, and TR a straight line through the origin.
Under imperfect competition (e.g. monopoly), the firm must lower price to sell more, so AR (= price) slopes downward, and MR falls faster than AR, lying below it. MR can even turn negative while AR (price) remains positive.
Revenue concepts connect directly to elasticity: when demand is price elastic, a price cut raises TR (because the percentage rise in quantity outweighs the percentage fall in price); when demand is inelastic, a price cut lowers TR. This is precisely why MR is positive over the elastic portion of a downward-sloping AR curve and negative over the inelastic portion — the point where MR = 0 is also exactly where price elasticity of demand equals 1 (unitary elastic).
Revenue theory is the mirror counterpart to cost theory in a firm's profit-maximisation decision: a firm compares the extra revenue from one more unit (MR) against the extra cost of producing it (MC), and keeps expanding output as long as MR exceeds MC. This MR = MC rule, common to every market form, is what links the Revenue chapter directly to both Cost and Market Forms.
Real-life Examples
Perfect competition
A wheat farmer selling at the fixed mandi price earns the same extra revenue (MR = price) no matter how many extra quintals are sold.
Imperfect competition
A smartphone brand must cut its price to sell additional units in a saturated market, so each extra phone sold adds less to revenue than the last one.
Step-by-step Graph
- 1
Perfect competition case
Draw AR = MR as a single horizontal straight line at the market price; draw TR as an upward-sloping straight line through the origin.
- 2
Imperfect competition case
Draw AR as a downward-sloping straight line (the firm's demand curve); draw MR also downward sloping but steeper, lying below AR.
- 3
Relate to TR
TR rises as long as MR is positive, reaches its maximum exactly when MR = 0, and falls once MR turns negative.
Formulas
Total Revenue
TR = Price × Quantity
Total earnings from selling a given quantity of output.
Average Revenue
AR = TR / Q
Revenue per unit sold — always equal to price.
Marginal Revenue
MRn = TRn − TRn−1
Extra revenue earned from selling one additional unit.
Tables
| Market | AR curve | MR curve |
|---|---|---|
| Perfect competition | Horizontal (= price) | Horizontal, coincides with AR |
| Imperfect competition | Downward sloping | Downward sloping, lying below AR |
Common Mistakes
- Assuming AR = MR always holds — this is true only under perfect competition.
- Forgetting that TR is maximised at MR = 0, not at the highest possible price.
- Mixing up AR with price when output is not sold at one uniform price, as under price discrimination.
Exam Tips
- Always specify the market structure before drawing AR/MR diagrams — the shapes differ fundamentally.
- When relating MR to TR, explicitly state: TR rises while MR > 0, peaks when MR = 0, falls when MR < 0.
- Use a clearly labelled table format for revenue numericals — TR, AR, MR rows alongside Quantity and Price.
Summary
- AR always equals price per unit, regardless of market structure.
- Under perfect competition, AR = MR, both horizontal straight lines.
- Under imperfect competition, AR slopes downward and MR lies below it, falling faster.
- TR is maximised exactly where MR = 0.
- MR can be negative while price (AR) stays positive under imperfect competition.
Practice MCQs
1. Under perfect competition, the AR curve is:
2. Total Revenue is maximum when:
3. Under imperfect competition, the MR curve lies:
4. The point at which MR = 0 corresponds to price elasticity of demand equal to:
5. Average Revenue is always equal to:
6. If a price cut leads to a fall in Total Revenue, demand for the good must be: