Thursday, 5 May 2011

Meaning of average revenue and marginal revenue of a firm

TOTAL REVENUE :- Total revenue is the total amount of money which is derived by multiplying the number of units sold by the price per unit.For example one firm sells 1 pens in market and the price per pen is Rs. 10. The total revenue will be 10 x10 = 100

2. MARGINAL REVENUE :- Marginal revenue is the net revenue earned by selling the last unit of production. Suppose a firm gets Rs. 100/- by selling ten books. Sale increases from ten to eleven units and total revenue increases from 100 to 109. The addition of Rs. 9/- is known as marginal revenue.

3. AVERAGE REVENUE :- It is found by dividing total revenue by the number of units sold. For example, a firm sells 100 hats, for Rs. 1000/- then the average revenue will be 1000/100 = Rs. 10. Average revenue represents the average sale price per unit of commodity. We may also say that AR = Price.

AVERAGE REVENUE AND MARGINAL REVENUE RELATIONSHIP

The relationship between the average and marginal revenue can be explained by the schedule and diagram :

EXPLANATION :- The above table shows that when average revenue falls, marginal revenue ( MR ) also falls but more swiftly than the AR. It can be explained by the following diagram :

EXPLANATION :- The above diagram shows that "ARC" remains above the "MRC" in monopoly or imperfect competition. When price falls, marginal revenue always remains below the average revenue.

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