1. Total, average and marginal revenue
- Total revenue (TR) = P × Q; also the sum of the MRs of all units sold.
- Average revenue (AR) = TR ÷ Q = P. The AR curve is the firm's demand curve.
- Marginal revenue (MR) = TRn − TRn−1: the addition to TR from selling one more unit.
- If TR falls when one more unit is sold, MR is negative.
| Concept | Meaning | How to find it |
|---|---|---|
| Total revenue (TR) | Whole receipts from sales | P × Q, or the sum of all MRs |
| Average revenue (AR) | Revenue per unit sold | TR ÷ Q (always equals price) |
| Marginal revenue (MR) | Addition to TR from one more unit | TRn − TRn−1 |
| Kurtas | AR | TR = AR × Q | MR = TRn − TRn−1 |
|---|---|---|---|
| 1 | 100 | 100 | 100 |
| 2 | 90 | 180 | 80 |
| 3 | 80 | 240 | 60 |
| 4 | 70 | 280 | 40 |
| 5 | 60 | 300 | 20 |
| 6 | 50 | 300 | 0 |
| 7 | 40 | 280 | -20 |
Key terms
- Average revenue
Revenue per unit sold; always equal to the price.
- Marginal revenue
The change in total revenue from selling one more unit.
2. Revenue curves under perfect competition
A firm under perfect competition is a price taker: it sells any quantity at the market price, and asking more would lose all its buyers (perfectly elastic demand).
- AR = MR = P: one horizontal line.
- TR: a straight line from the origin with slope P; it has no maximum.
| Coils | Price = AR | TR | MR |
|---|---|---|---|
| 1 | 40 | 40 | 40 |
| 2 | 40 | 80 | 40 |
| 3 | 40 | 120 | 40 |
| 4 | 40 | 160 | 40 |
| 5 | 40 | 200 | 40 |
Key terms
- Price taker
A firm too small to affect the market price, which it accepts as given.
3. Revenue curves under imperfect competition
Under monopoly and monopolistic competition the firm must lower its price to sell more, so AR slopes downward (more elastic under monopolistic competition, where close substitutes exist).
- MR = price of the extra unit − loss on the earlier units, so MR < AR.
- With a straight-line AR = a − bQ: TR = aQ − bQ² and MR = a − 2bQ: same intercept, twice the slope.
- TR rises while MR > 0, is maximum where MR = 0, and falls when MR < 0: an inverted U.
| Working (₹) | Result | |
|---|---|---|
| Price of the 5th vase | 480 | +480 |
| Loss on the first 4 vases | 4 × (500 − 480) | −80 |
| Marginal revenue | 480 − 80 | 400 |
| Check with TR | 2,400 − 2,000 | 400 |
| Perfect competition | Imperfect competition | |
|---|---|---|
| Price | Given by the market (price taker) | Set by the firm; must fall to sell more |
| AR and MR | One horizontal line, AR = MR | Both slope down, MR below AR |
| TR | Straight line from the origin | Inverted U, maximum where MR = 0 |
| Can MR be negative? | No | Yes, after TR peaks |
Key terms
- Inverted-U TR
The total revenue curve of a firm that must cut its price to sell more: it rises, peaks where MR = 0, then falls.
4. Producer's equilibrium: the TR–TC approach
Profit = TR − TC. The producer is in equilibrium at the output where this positive gap is the largest.
- On a diagram, TC starts at TFC above the origin; TR (perfect competition) starts at the origin.
- Where TR and TC cross, profit is zero: break-even points.
- At the largest gap the slopes of TR and TC are equal.
| Batches | TR = 30Q | TC | Profit | MR | MC |
|---|---|---|---|---|---|
| 0 | 0 | 40 | -40 | — | — |
| 1 | 30 | 60 | -30 | 30 | 20 |
| 2 | 60 | 75 | -15 | 30 | 15 |
| 3 | 90 | 85 | 5 | 30 | 10 |
| 4 | 120 | 100 | 20 | 30 | 15 |
| 5 | 150 | 130 | 20 | 30 | 30 |
| 6 | 180 | 170 | 10 | 30 | 40 |
Key terms
- Producer's equilibrium
The output at which a producer earns the maximum profit and has no reason to change output.
- Break-even point
An output where TR = TC and profit is zero.
5. Producer's equilibrium: the MR–MC approach
Conditions: (1) MR = MC; (2) MC is rising at that output, i.e. MC cuts MR from below, so beyond it MC > MR.
- If MR > MC, more output raises profit; if MR < MC, less output raises profit.
- An MR = MC point with MC falling is not an equilibrium (profit is lowest there).
- Perfect competition: MR = P, so equilibrium is where MC = P and MC is rising.
| Bags | MR | MC | TC | Profit |
|---|---|---|---|---|
| 1 | 25 | 25 | 35 | -10 |
| 2 | 25 | 18 | 53 | -3 |
| 3 | 25 | 15 | 68 | 7 |
| 4 | 25 | 20 | 88 | 12 |
| 5 | 25 | 25 | 113 | 12 |
| 6 | 25 | 32 | 145 | 5 |
| Market form | MR equals | So the condition becomes |
|---|---|---|
| Perfect competition | Price (AR) | MC = price, with MC rising |
| Imperfect competition | Less than price | MC = MR < price |
Key terms
- Second-order condition
At equilibrium MC must be rising, cutting MR from below.
6. Working with schedules; why both approaches agree
- Build TR, profit, MR and MC columns, each with its formula.
- If no output has MR exactly equal to MC, produce every unit with MR ≥ MC and stop before the first unit with MR < MC.
- If MR = MC exactly at an output, profit is the same at that output and the one before it; the equilibrium is the output where MR = MC.
- Both approaches agree: the slope of TR is MR, the slope of TC is MC, and the gap TR − TC is widest where the slopes are equal.
| Kurtas | MR | MC | Produce this kurta? |
|---|---|---|---|
| 1 | 100 | 60 | Yes: MR ≥ MC |
| 2 | 80 | 50 | Yes: MR ≥ MC |
| 3 | 60 | 40 | Yes: MR ≥ MC |
| 4 | 40 | 50 | No: MR < MC |
| 5 | 20 | 70 | No: MR < MC |
| 6 | 0 | 90 | No: MR < MC |
| Gap TR − TC is… | because… | so the firm… |
|---|---|---|
| widening | TR is steeper than TC (MR > MC) | raises output |
| at its largest | TR and TC are parallel (MR = MC) | stays |
| narrowing | TC is steeper than TR (MC > MR) | cuts output |
| Approach | Equilibrium condition | Where seen |
|---|---|---|
| TR–TC | Largest positive TR − TC | Biggest vertical gap between TR and TC |
| MR–MC | MR = MC and MC rising | MC cuts MR from below |
Key terms
- MR ≥ MC rule
In a schedule without an exact equality, the firm produces up to the last unit whose MR is at least its MC.
Exam tips
Common mistakes
- Saying AR equals MR for every firm: only under perfect competition.
- Drawing MR above AR, or MR with the same slope as a straight-line AR.
- Choosing the output of maximum TR (MR = 0) as the profit-maximising output.
- Stating only MR = MC and forgetting that MC must be rising.
- Computing MR as TR ÷ Q, or subtracting the next total instead of the previous one.
How marks are usually awarded
- 1 mark: one correct option, value or term.
- 2 marks: a definition with an example, or a value with working.
- 3 marks: three linked points, or a completed short schedule.
- 5 marks: parts answered in order, with schedules or described diagrams and reasons.