;k dqUnsUnrq’kkjgkj/koyk] ;k “kqHkzoL=ko`rk

;k oh.kkojn.Mef.Mrdjk] ;k “osrin~ekluk Dr. Mayank Mohan

HOD

Department of Economics

M.M. College Modinagar

TR, AR & MR

Total Revenue, Average Revenue

and Marginal Revenue

• Wealth-maximizing

• Each seller has sufficient market power to

set the selling price higher and sell less OR

set the selling price lower and sell more

• The demand curve facing the price searcher

is downward sloping

Total Revenue, Average Revenue

and Marginal Revenue

• Total revenue ( TR ) is the total amount of

money(or some other good) that a firm

receives from the sale of its goods. It the

firm practices single pricing rather than

price discrimination, TR = total expenditure

of the consumer = P x Q

Total Revenue, Average Revenue

and Marginal Revenue

• Average revenue ( AR ) is the total amount

of money(or some other good) that a firm

receives from the sale divided by the

number of units of goods sold.

• AR = TR/Q, since TR=P x Q, then AR = P

for single pricing practice

• And since MUV = DD = P, then

• MUV = DD = P = AR

Total Revenue, Average Revenue

and Marginal Revenue

• Marginal revenue ( MR ) is the change in

total revenue resulting from selling an extra

unit of goods.

• MR = TR/Q, where TR = change in TR

due to change in Q, Q = change in Q

To find T R from the M R curve

• For a certain known quantity transacted, the

area under the MR and above the horizontal

axis is the T R . (I.e. the sum of the Marginal

Revenues of all units of goods.)

• The slope of the TR curve is MR. Why?

• And, MR is always smaller Price for single

pricing arrangement (I.e. MR < P) Why?

(Hint MR<AR, AR=P for single pricing)

Price

Quantity

ARMR

For a certain known quantity transacted, the area under the

MR and above the horizontal axis is the T R .

(I.e. the sum of the Marginal Revenues of all units of goods,

I.e. area 0ACQ)

Also, TR = AR x Q, I.e. area 0PBQ

Q

P

0

C

A

B

The slope of the TR curve is MR

$

Quantity0

Slope at point E =

MR

slope =AR

TRE

The relations between TR, AR and MR

Total Revenue, Average Revenue

and Marginal Revenue

• The slope of Marginal revenue ( MR ) is

twice the slope of AR.

• Why? (See next slide)

• (The relations between TR, AR and MR can

also be applied to TUV, AUV and MUV)

P, AR, MR

Quantity

MUV = DD = P = AR

Q

AR

TR

Total

Revenue

=AR

curveMR

curve

P, AR, MR

Quantity

MUV = DD = P = AR

Q

AR

TR

TR

=

Total

Revenue

AR

curveMR

curve

P, AR, MR

Quantity

MUV = DD = P = AR

Q

AR

=AR

curve

MR

curve

Total Revenue, Average Revenue

and Marginal Revenue

• The areas of the 2 triangles must be the same

for total revenue should be the same.

• The two triangles must be the same only if

the MR cuts the midpoint of the

perpendicular line drawn from the DD to the

vertical axis.

• Hence, the slope of Marginal revenue ( MR )

is twice the slope of AR.

The relationship between AR and MR

• The slope of MR is twice the slope of AR

• MR curve is not the demand curve (the

relationship between price and quantity).

• However, if the price searcher practises price

discrimination or All-or-Nothing Pricing

Arrangement, then All-or-nothing pricing =

• All-or-nothing DD = AUV , which is >

MUV , and also downward-sloping

Revision on different pricing arrangement

• Single Pricing Arrangement

• with Consumer Surplus = TUV - TEV

• MUV = DD = AR = P [>MR] {<AUV}

• All-or-Nothing Pricing Arrangement

• All consumer surplus will be extracted, so

that TUV = TEV

• hence, All-or-Nothing DD curve =

All-or-nothing pricing = AUV {>MUV}

REVISION

Single Pricing

Arrangement

All-or-nothing Pricing

Arrangement

AUV AUV

MUV MUV

P

TUV= TEV + CS TUV= TEV

= AR

= AR

= MRMR

DEMAND

DEMAND

P

Q Q

Price

Quantity

ARMR

A Price -Searcher = Price-Searcher’s Market

MR cuts the midpoint of the perpendicular

line drawn from the AR to the vertical axis.