relationship between total revenue average revenue and marginal revenue business economics sem 1


relationship between total revenue average revenue and marginal revenue business economics sem 1

Explain the relationship between total revenue average revenue and marginal revenue/ relationship between total revenue TR, average revenue AR, and marginal revenue MR

Total revenue:

  • The total revenue or income earned by a firm or producer from the sale of the output he produced is called the total revenue. Thus, the total revenue is the price multiply the quantity of output.
  • TR = P×Q
    Where,
    TR = Total Revenue.
    P = Price of a commodity.
    Q = Total Output sold.
  • Thus, Total revenue is the sum of all sales, receipts or income of a firm in the market.

Average revenue:

  • The average revenue refers to the revenue obtained by the firm by selling the per unit of output of a commodity. It is obtained by dividing the total revenue by total unit of output sold in the market.
  • AR = TR/Q
    Or
    AR = P
    Where, AR= Average revenue.
  • the average revenue curve of a firm is also the demand curve of the consumer.

Marginal revenue:

  • Marginal revenue is the additional revenue earned by selling an additional unit of the commodity. In other words, marginal revenue is the addition commodity made to the total revenue by selling one more unit of the commodity.
  • MR= TRn-TRn-1

Q. Given the following Date:

Q (Quantity) 1 2 3 4 5
P (Price) 10 9 8 7 6
  1. Calculate TR, AR, and MR.
  2. Explain the relationship between TR and MR, MR and AR
Q P 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

Relationship between TR and MR

  1. MR= TRn-TRn-1
  2. When AS TR increases at a diminishing rate, MR declines

Relationship between MR and AR

  1. Since MR is less than AR, AR declines
  2. As the data is a liner, the declines in MR is twice as much as the decline in AR

Total revenue is calculated by multiplying price and quantity. As quantity increases TR increases initially then it decreases. AR is same as price. MR decreases constantly and becomes negative eventually.

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Given the following data. Calculate TR, AR, and MR. Explain the relationship between/relationship between total revenue average revenue and marginal revenue

(a) TR and MR

(b) AR and MR

Q (Quantity) 1 2 3 4 5
P (Price) 100 90 80 70 60

 

Q P TR AR =  MR
1 100 100 100 100
2 90 180 90 80
3 80 240 80 60
4 70 280 70 40
5 60 300 60 20
  • Relationship between TR and MR: MR measures the changes in TR. As TR increases at a diminishing rate, MR declines with every increase in output sold.
  • Relationship between AR and MR: Since the data given pertains to imperfect competition there is an inverse relationship between price and quantity sold. with every fall in price, AR declines.
  • AR>MR
  • The decline in MR is twice as much as the decline in AR.

Given the following data calculate TR, AR, and MR. Also, identify the market structure and state the relationship between TR, AR, and MR/ relationship between total revenue average revenue and marginal revenue

Total revenue:

  • The total revenue or income earned by a firm or producer from the sale of the output he produced is called the total revenue. Thus, the total revenue is the price multiply the quantity of output.
  • TR = P×Q
    Where,
    TR = Total Revenue.
    P = Price of a commodity.
    Q = Total Output sold.
  • Thus, Total revenue is the sum of all sales, receipts or income of a firm in the market.

Average revenue:

  • The average revenue refers to the revenue obtained by the firm by selling the per unit of output of a commodity. It is obtained by dividing the total revenue by total unit of output sold in the market.
  • AR = TR/Q
    Or
    AR = P
    Where, AR= Average revenue.
  • the average revenue curve of a firm is also the demand curve of the consumer.

Marginal revenue:

  • Marginal revenue is the additional revenue earned by selling an additional unit of the commodity. In other words, marginal revenue is the addition commodity made to the total revenue by selling one more unit of the commodity.
  • MR= TRn-TRn-1

relationship between total revenue average revenue and marginal revenue from given data:

Output (Q) 1 2 3 4 5 6 7
Price 10 10 10 10 10 10 10

 

Q P TR AR = MR
1 10 10 10 10
2 10 20 10 10
3 10 30 10 10
4 10 40 10 10
5 10 50 10 10
6 10 60 10 10
7 10 70 10 10
  1. The market structure is perfect for competition.
  2. Under perfect competition, the price per unit remains constant at all levels of output due to features like homogeneous output, free entry and exit of firms, and the existence of a large number of firms. Price=AR
  3. Since the price is constant, TR increases at the same rate as the price.
  4. As TR increases at the same rate, MR is constant and is equal to AR or Price

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relationship between total revenue average revenue and marginal revenue

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