Concepts of Revenue Class 12 Economics Notes and Questions

Please refer to Economics Concepts of Revenue Class 12 Economics Notes and important questions below. The Class 12 Economics Chapter wise notes have been prepared based on the latest syllabus issued for the current academic year by CBSE. Students should revise these notes and go through important Class 12 Economics examination questions given below to obtain better marks in exams

Concepts of Revenue Class 12 Economics Notes and Questions

The below Class 12 Concepts of Revenue notes have been designed by expert Economics teachers. These will help you a lot to understand all important topics given in your NCERT Class 12 Economics textbook.

Question. Define Total Revenue (TR), Average Revenue (AR) and Marginal Revenue (MR).
Ans. Total Revenue refers to total receipts of the sale of given quantity of a product. It is obtained by multiplying price per unit and quantity sold.
TR= P X Q
Average Revenue refers to per unit revenue. It is obtained by dividing Total Revenue by the units of quantity sold.
𝐴𝑅 = 𝑇𝑅/𝑄 = 𝑃 𝑋 𝑄 / 𝑄 = 𝑃
Marginal Revenue refers to addition in the total revenue by selling one more unit of a product.
MR= TR_n-TR_n-1
= Δ𝑇𝑅/Δ𝑄

Question. Explain the relationship between Total Revenue, Marginal Revenue and Average Revenue under imperfect competition.
Ans.

Relationship Between TR and MR
I. When Marginal Revenue decreases, but remains positive, Total Revenue increases at decreasing rate. (In the table, it is shown from 1-5 units of quantity sold)
II. When Marginal Revenue is zero, Total Revenue will be maximum and constant. (In the table, it is shown by 6th units of quantity sold)
IV. When Marginal Revenue becomes negative, Total Revenue starts falling. (In the table, it is shown by 7th units of quantity sold)

Relationship Between TR and MR
I. When Average Revenue is constant, then Marginal Revenue is equal to Average Revenue. (In the table, it is shown by 1st unit of quantity sold)
II. When Average Revenue decreases, then Marginal Revenue is less than Average Revenue. (In the table, it is shown by 2nd unit of quantity sold)

Note: Value of Marginal Revenue can be zero and negative, but value of Total Revenue and Average Revenue is always positive.

Question. Explain the relationship between Total Revenue, Marginal Revenue and Average Revenue under perfect competition.
Ans.

Under perfect competition, price of the product is always constant for a firm. It means a firm can sell any quantity at a given price. Therefore, addition in total revenue by selling one more unit i.e. Marginal Revenue is always equal to per unit price, i.e. Average Revenue. So, AR and MR curves are equal and parallel to x-axis.

Since Marginal Revenue is constant, so Total Revenue always increases at a constant rate. Thus, graphically TR curve is an upward sloping straight line from origin.

Break-Even Point
Break-even point refers to that point where total revenue is equal to the total cost. At break-even point, firm is able to meet all its cost.

• As shown in the diagram, P is the break-even point at this point, TR=TC.
• Point P is the situation of normal profits (also known as No Profit No Loss situation).
• Any point below P indicates abnormal losses, whereas, any point above P shows abnormal profits.

We know, break-even point is determined when:
TR=TC
Dividing both sides by Output, we get:
𝑇𝑅/𝑄 = 𝑇𝐶/𝑄
AR=AC {𝑇𝑅/𝑄 = 𝐴𝑅 𝑎𝑛𝑑 𝑇𝐶/𝑄 = 𝐴𝐶}

So, break-even point is when TR=TC or AR=AC.

Shut-Down Point

Shut-down point refers to situation when a firm is able to cover its variable costs only. In other words, it is a situation when total revenue (TR) received from sale of goods is just equal to total variable cost (TVC) of production.
  i.e., TR=TVC
  or   𝑇𝑅/𝑄 = 𝑇𝑉𝐶/𝑄
  or AR=AVC {𝑇𝑅/𝑄 = 𝐴𝑅 𝑎𝑛𝑑 𝑇𝑉𝐶/𝑄 = 𝐴𝑉𝐶}

At the shut-down point, firm incurs loss of fixed cost. The firm does not stop the product at this point as fixed cost will still be incurred. However, if AR further falls and is unable to meet even AVC, then firm will shut-down the operations.

In the above diagram, it occurs at point L, when AR=AVC. At this point, firm is unable to meet fixed costs.

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