Friday, February 21, 2014

Concept of Revenue



Concept of Revenue

For the purpose of demand analysis, it is considered useful to distinguish between various types of revenue:

Average Revenue (AR);
AR means the total receipts from sales divided by the number of unit sold.

AR= TR/Q

Total Revenue (TR):

TR means the total sales proceeds .it can be ascertained by multiplying quantity  sold by price.
TR =PxQ

Incremental Revenue (IR):

IR measures then differences between the new TR and existing TR

IR=R2-R1 =∆R

Marginal Revenue (MR);

It is the additional revenue which would be earned by selling an additional unit of a firm‟s products. It shows the change in TR when one more or one less unit is sold.

MR= R2-R1/Q2-Q1 = ∆R/∆Q

Where, R1= TR before price change R2= TR after price change

Q1 = old quantity before price change

Q2 = new quantity after price change


The relationship between AR, TR and MR can be understand with the help of the following table
Quantity



demanded
AR
TR
MR
(Q)



1
9
9
9
2
8
16
7
3
7
21
5
4
6
24
3
5
5
25
1
6
4
24
-1
7
3
21
-3
8
2
16
-5
9
1
9
-7

The study of the above table reveals that:

1.  So long as AR is falling, MR will be less than AR

2.  MR falls more steeply than AR

3.  TR will be rising so long as MR is positive

4.  Where MR is negative, TR will be falling

5.  TR will be maximum at the point where MR is Zero.
The relation between elasticity of demand and TR can be summarized as under:

Change in price
Elasticity .>1
Elasticity .=1
Elasticity <1
Rises in price
TR falls
TR unchanged
TR rises
Fall in price
TR rises
TR unchanged
TR falls

Incremental Revenue is the change in total revenue irrespective of changes in price. It is not confined to the effect of price change. it rather measures the the effect of managerial decision on total revenue.