CLASS - XI (SESSION 2023-24)

SUBJECT: ECONOMICS (030) DATE: 08/12/2023

Chapter 7:- Revenue & Producer’s equilibrium
HANDOUT-2
MODE OF COLLABORATION: Collaborative and Explanatory
1. Relationship Between Revenue Concepts:- The relationship between different revenue
concepts can be discussed under two situations:-

CASE I:- WHEN PRICE REMAINS CONSTANT:- (a) Relationship Between AR and
MR:- When price remains same at all output levels(like in case of perfect competition), no firm
is in a position to influence the market price of the product. A firm can sell more quantities of
output at the same price. It means, the revenue from every additional unit (MR) is equal to
AR.As a result, both AR and MR curve is a horizontal straight line parallel to the X-axis. As a
result, the demand curve (AR curve) is perfectly elastic. Always remember that when a firm is
able to sell more output at the same price, then AR=MR at all level of output.
(b) Relationship between TR and MR:- When price remains constant, firms can sell any
quantity of output at the price fixed by the market. As a result, the MR curve(AR curve) is a
horizontal straight line parallel to the X-axis. Since MR remains constant, TR also increases at a
constant rate. Due to this reason, the TR curve is a positively sloped straight line.
(c)Relationship between TR and Price Line. When price remains constant at all the levels of
output, then Price =AR=MR. Therefore, the price line is the same as the MR curve. The area
under the MR curve or price line will be equal to TR.

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CASE II:- WHEN PRICE FALLS WITH RISE IN OUTPUT:-
(a)Relationship between AR and MR:-When firms can increase their volume of sales only by
decreasing the price that is under imperfect competition, then AR falls with increase in sale. It
means, revenue from every additional unit(MR) will be less than AR. As a result, both AR and
MR curves slopes downwards from left to right. In this case, both MR and AR fall with increase
in output. However, MR falls at a rate more than the rate of fall in AR.As a result, MR curve is
steeper than the AR curve because MR is limited to one unit, whereas AR is derived by all the
units. It leads to comparatively lesser fall in AR than fall in MR.MR curve can be zero and
negative, while AR remains positive.

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(b)Relationship between TR and MR:-It can be discussed as:-
(1) As long as MR is positive, TR increases(or when TR rises, MR is positive)
(2)When MR is zero, TR is at its maximum point(or when TR is maximum, MR is zero)
(3)When MR becomes negative, TR starts falling(or when TR falls, MR is negative)

Producer’s Equilibrium

A firm or producer is said to be in equilibrium when there is no inclination to expand or contact

the production or output. In this state, the producer has either maximum profits or minimum
losses. Producer’s equilibrium refers to that combination of price and output which brings
maximum profit to the producer and profit declines as more is produced. Producer’s
equilibrium can be determined through the Marginal Revenue and Marginal Cost
Approach (MR-MC Approach).

MR-MC Approach

Three important conditions of MC-MR approach are

1. MC=MR

2. MC curve must cut the MR curve from below

3. Mc must rise after the equilibrium

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According to MR-MC approach, producer’s equilibrium refers to the stage of that output level at
which –

1. MC=MR

As long as MC is less than MR, the producer can make more profits i.e. it is profitable for the
producer to go on producing more because profits will increase. He stops producing more only
when MC becomes equal to MR.

We know that MR is the addition to TR from the sale of one additional unit of output and MC is
the addition to TC for increasing production by one unit. The aim of every producer is to
maximize profits. To achieve this aim, the firm will compare its MR and MC

. Profits will increase as long as MR exceeds MC and the profits will fall if MC is greater than
MR. So, producer equilibrium is not achieved when MC<MR as there is scope to increase
profits. The producer will also not be in equilibrium when MC>MR because the benefit is less
than the cost. It means the firm will be at equilibrium when MC=MR.

2. MC is greater than MR after MR=MC output level

When MC is greater than MR after equilibrium it means producing more will lead to decline in
profits. MC=MR is a necessary condition but it is not sufficient to ensure producer equilibrium.
This is because MC=MR may occur in more than one level of output. However, out of these,
only that level of output is the equilibrium output when MC becomes greater than MR after the
equilibrium. It is because if MC is greater than MR, then producing beyond MC-MR will reduce
profits. But, if MC is less than MR, then producing beyond MC=MR will be profitable.

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Therefore, the first condition must be supplemented with the second condition to attain
producer’s equilibrium.

In the figure given above, output is shown on the x-axis and revenue and costs on the y-axis.
Both AR and MR curves are straight lines parallel to the x-axis. The MC curve is u-shaped.
Producer’s equilibrium will be determined at OQ level of output corresponding to point K
because only at point K, both the conditions are met.

Although MR-MC is satisfied at point R, it is not the point of equilibrium since the second
condition, that MC be greater than MR after MC=MR, is not satisfied.

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 QUESTIONS TO BE DISCUSSED IN CLASS
Q1. A shopkeeper sold 25 calculators at the price of Rs. 125 each. His total receipts increased to
Rs. 3,380 after selling 26 calculators. At what price did he sell the 26th calculator?

Q2.When sale of a unit increased from 20 units to 35 units, the total revenue increased by
Rs.1,200. Calculate marginal revenue.
Q3.Suppose, a book seller can sell 10 books at the price of Rs.200 per book. His marginal
revenue from the 11th book is Rs.255.At what price did he sell the 11th book?
Q4.When output increases from 50 units to 70 units, TR increases from Rs.4,000 to Rs.5,000.
Calculate MR.
Q5.The total revenue of a firm increased by Rs. 5,400, when his sale increased from 35 units to
50 units. Calculate marginal revenue of the firm.
Q6. In the following table, find out the level of output, at which the producer will be in
equilibrium. Give reason for your answer.(All India 2013)

Output (units) 1 2 3 4 5

Marginal Revenue 8 8 8 8 8

(Rs)

Marginal Cost (Rs) 10 8 7 8 9

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Q7. A producer can sell more of a good at the same price. Prepare a Total Revenue and Marginal
Revenue schedule. Take four output levels.(All India 2010)

Units of Output (Q) W Marginal Revenue Total Revenue

Price (MR in Rs) (TR in Rs)

1 12 12 12

2 12 12 24

3 12 12 36

4 12 12 42

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HOMEWORK QUESTIONS
Q11, Q12, Q15, Q16 of book

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