Total revenue and marginal relationship

Total Revenue, Average Revenue and Marginal Revenue

total revenue and marginal relationship

Marginal revenue is the slope of the total revenue curve and is one of two revenue The relation between marginal revenue and the quantity of output produced. One way to think about the relationship between marginal revenue and total revenue is that total revenue is the sum of the marginal revenues for each unit of a. Marginal revenue is calculated by dividing the change in total revenue by the change in the number of units sold. The change in total revenue is calculated by .

The average propensity to consume is the average amount of total household income that is devoted consumption expenditures. The change in total revenue resulting from a change in the quantity of output sold.

total revenue and marginal relationship

Marginal revenue indicates how much extra revenue a perfectly competitive firm receives for selling an extra unit of output. It is found by dividing the change in total revenue by the change in the quantity of output. Marginal revenue is the slope of the total revenue curve and is one of two revenue concepts derived from total revenue.

The other is average revenue.

Elasticity and the Total Revenue Test- Micro 2.9

To maximize profit, a perfectly competitive firm equates marginal revenue and marginal cost. Marginal revenue is the extra revenue generated when a perfectly competitive firm sells one more unit of output. It plays a key role in the profit -maximizing decision of a perfectly competitive firm relative to marginal cost.

Total Revenue, Average Revenue and Marginal Revenue

A perfectly competitive firm maximizes profit by equating marginal revenue, the extra revenue generated from production, with marginal cost, the extra cost of production. If these two marginals are not equal, then profit can be increased by producing more or less output.

The relation between marginal revenue and the quantity of output produced depends on market structure. For a perfectly competitive firm, marginal revenue is equal to price and average revenueall three of which are constant.

total revenue and marginal relationship

For a monopolymonopolistically competitive, or oligopoly firm, marginal revenue is less than average revenue and price, all three of which decrease with larger quantities of output. The constant or decreasing nature of marginal revenue is a prime indication of the market control of a firm.

Elasticity, Total Revenue and Marginal Revenue

Marginal revenue can be represented in a table or as a curve. For a perfectly competitive firm, the marginal revenue curve is a horizontal, or perfectly elasticline. For a monopoly, oligopoly, or monopolistically competitive firm, the marginal revenue curve is negatively sloped.

Table 4 shows that as AR or price increases from Rs. In the same way, TR increases from Rs.

As a result, MR also increases from Rs. MR also follows the same trend i. It means as more and more units of a commodity are sold, average revenue falls at lower speed. MR curve also moves in the same direction. The convexity shows that MR falls but at a faster speed.

Relationship between Average and Marginal Revenue Curves

The figure 6 shows that if AR is concave to the origin, MR will also be concave to the origin. It means average revenue is falling at a higher rate for each additional unit of a commodity sold.

Similar would be the case for MR curve. The elasticity of demand, average revenue and marginal revenue has a close relationship. If a firm knows any two of the three elements viz; average revenue and marginal revenue then it can easily find out the third element i.

The formula for the calculation is: AB is the average revenue or demand curve and AN is the marginal revenue curve.

total revenue and marginal relationship

Putting PL in place of AE in the above equation, we shall get In this way, if value of Ep is one, it means that price elasticity of demand is unity. Similarly, if it is more than one, price elasticity of demand is greater than unity and if it is less than one, price elasticity of demand is less than unity.