Download Revenue and Supply

STATE COUNCIL OF EDUCATIONAL RESEARCH &TRAINING
VARUN MARG, DEFENCE COLONY, NEW DELHI
Teaching- Learning Material
(On the basis of weekly syllabus for the month of July’ 2011)
For
Class XII
PGT (Economics)
Chief Advisor
Ms. Rashmi Krishnan
Director, SCERT
Advisor
Dr. Pratibha Sharma
Joint Director, SCERT
Mohammad Zamir
Principal, DIET Keshav Puram
Technical Support
1.Mr.V.K.Sodhi ,Consultant
2.Ms.Sapna Yadav,Sr. Lecturer,ET
Co- ordinators
1. Dr. Seema Srivastava
Sr. Lecturer, DIET, Moti Bagh
2. Ms. Meenakshi Yadav
Sr. Lecturer, SCERT
Contributors
1. Dr. Seema Srivastava
Sr. Lecturer, DIET, Moti Bagh
2. Ms. Meenakshi Yadav
Sr. Lecturer, SCERT
3. Mr Bharat Thakur
PGT (Economics)
RPVV, Surajmal Vihar
Support Material
For
Teachers
In
Economics – Class XII
Co-ordinators
1. Dr. Seema Srivastava
2. Ms. Meenakshi Yadav
Contributors
1. Dr. Seema Srivastava
2. Ms. Meenakshi Yadav
3. Mr.Bharat Thakur
Technical Support
1.Mr.V.K.Sodhi
2.Ms.Sapna Yadav
Class – XII
Teaching -Learning Material for PGT (Economics)
Based on “Week Wise Distribution of Syllabus 2011 -2012
For the Month of July: Unit III (Conti---) Revenue and Supply
(1.07.2011 – 8.07.2011) 7 days
Overview of the pervious concept / component related units (Units II & Unit III)
Previous Concepts
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In the previous chapters students have already been taught about, Demand,
Elasticity of Demand, Cost- its types (TC, TFC, AFC, TVC, AVC, MC; etc - meaning
and their relationships. These concepts have to be revised before proceeding to
the concept of Revenue). The teachers must ensure that Student have adequate
knowledge of the concepts likeCosts – Economic Cost, Private Cost vs. Social Cost, the time element and cost
(very short run, short run large run )
Explicit Cost, Implicit cost and Normal Profits
Total Fixed Cost (TFC), Total Variable Cost (TVC), Total Cost (TC = TFC + TVC),
computations and projection of TC, TFC, TVC.
AFC, AVC (Definition and projection in graphs/ Curves) (ATC=AVC+AFC),Marginal
Cost-Its concept and computation)
Depiction of MC, Relationship between TC and MC relationship between AVC and
MC.
Relationship between ATC, AVC & MC.
Note: One must ensure that students can define the above mentioned terms and draw
the curves related to the concepts; different relationships and can interpret in terms of
different costs computations. Adequate practice of the same is essential
Abstract
This material deals with the concepts of Revenue -its types; Total Revenue (TR), Average
Revenue (AR), Marginal Revenue (MR), Meaning of Producer’s Equilibrium,
Determination of Producer’s Equilibrium in terms of MR & MC. It will also elaborate on
the concept of Supply, Market Supply and Determinants of supply. The term ‘Revenue’
states the income of the Firm that it earns when it sells a given level of output. The main
objective of the firm is Profit Maximisation where Profit = Revenue – *Cost of Production
(*the expenditure incurred by a firm for producing a given level of output). Difference
between Revenue and Profit has also been explained for clarity. The concepts of TR, AR,
MR and Producer’s Equilibrium in terms of MC & MR has been explained in general. In
later units these will be used in various types and Forms of Market and competition.
The unit will also explain the Supply, Markets Supply and Determinants of supply.
Learning Objectives
After going through the Material / Unit you will be able to:
1.
2.
3.
4.
5.
6.
7.
8.
Define the Terms - Total Revenue (TR), Average Revenue (AR), and Marginal Revenue (MR).
Compute TR, AR, & MR;
Explain the relationship between TR, AR and MR.
State and depict (draw curves) Producers Equilibrium in terms of MR and MC.
Define terms like Supply, Market Supply.
Compute Market Supply
Explain the determinants of Supply.
State some exceptions to the Law of Supply.
Teaching points
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Concept of Revenue
Types of Revenue – Total Revenue (TR), Average Revenue (AR)and Marginal Revenue (MR)
Relationship between TR, AR and MR
Producers’ Equilibrium – meaning and its condition in terms of MR and MC.
Supply, computing market supply, Determinants of supply, Exceptions to the Law of Supply.
Basic Concepts
1. Revenue:
Recapitulate the relationship that exists between Revenue, Cost and Profit. For calculating Profit
the firm deducts the total expenditure or cost incurred from the Revenue. Reinstate:
Profit = Revenue – Cost
How is Revenue defined?
Generally “Revenue” is termed as” Earnings”. It is the income that a firm receives from its business
activities, usually from sale of goods and service to customers.
Hence Revenue can be defined as:
In business, Revenue is income that a company receives from its normal
business activities usually from sale of goods and service to customers.
How is Revenue Calculated?
Revenue is calculated by multiplying the price at which goods and services are sold by the
number of units sold. It can be put algebraically as under:Formula: R= P x Q , where
R= Revenue of the firm
P = Price per unit of the output sold
Q = Quantity / Units sold
Example
One firm sells Rs 10 per bottle in the market. If the firm sells total 100 bottles, then calculate Total
Revenue for the firm.
Solution: Apply the formula:
R=PxQ
= 10 x 100
= Rs. 1000
Continuing with the same example, if the cost of producing 100 bottles is Rs 800, then what will be
the profit earned by the firm?
As: - Profit = Revenue – Cost
= 1000 – 800
= Rs. 200
Here the difference between the Revenue and Profit must be made clear, so that there is clarity
about the term ‘Revenue’
1.1 Types of Revenue
There are three types which have to be explained one by one:
i. Total Revenue (TR)
ii. Average Revenue (AR)
iii. Marginal Revenue (MR)
Total Revenue: Total Revenue refers to the total amount of money received by the firm during
specific periods. It is derived by multiplying the number of units sold by the price per unit. Therefore
Revenue in general refers to Total Revenue. It is denoted as TR.
Formula for calculation of TR is;TR = P x Q
Where
TR is total revenue of the firm during a specific period
P is price per unit of the output
Q is quantity sold.
Example: A firm has sold 5 dozens of pens. The cost per pen was Rs. 20. The total revenue of the
firm is:
TR
=
pxq
=
20 x 60
=
Rs. 1200
1.1.2. Average Revenue: - Average Revenue is the revenue generated per unit of output sold. It can
also be defined as total revenue per unit of output sold.
The average revenue received by a firm is Total Revenue divided by quantity. It is expressed as:AR=TR
q
Where AR = Average Revenue
TR= Total Revenue
q = Quantity sold
Average Revenue is more widely used as Price. At times, it is also helpful in calculating Total Revenue
I.e. Total Revenue= Average Revenue (P) × quantity (q)
Example:Unit/quantity
2
4
5
6
Total Revenue
20
40
60
90
Average Revenue
10
10
12
15
1.1.3. Marginal Revenue: - Marginal Revenue is the increase in revenue from selling one additional
unit of output. It is also called as revenue obtained from the last unit sold. It is calculated by taking
the difference between Total Revenue before and after an increase in the rate of production.
Example: In a firm sells 10 object @ Rs.20 each and further it sells 11 object @ Rs. 19 each, then
the marginal revenue from the 11th object is (10× 20) - (11×19) = Rs. 9
Marginal Revenue can also be depicted as change in Total Revenue/Change in quantity
MR = Change in Total Revenue
---------------------------------Change in Quantity
MR = ∆TR
∆Q
(When price of product is constant, Marginal Revenue is the same as Price. This will be applicable
in conditions of Prefect Competition to be dealt with in later chapter)
The same can also be explained with the example given below:Relationship Between Average and Marginal Revenue
No. Of Units
1
2
3
4
5
6
7
TR (1)
10
18
24
28
30
28
21
AR (2)
10
9
8
7
6
4.6
3
MR (3)
10
8
6
4
2
-2.6
-7
Diagram -1
Relation between Average Revenue (AR)
and Marginal Revenue (MR)
2.1
Producers Equilibrium in terms of MC = MR
Producer’s Equilibrium:
Equilibrium is a condition where quantity demanded is equal to quantity supplied at a particular
price.
Producers’ equilibrium is established at level of their Profit Maximisation. The condition of Profit
Maximisation would take place at a point where his Marginal Revenue (MR) is equal to his Marginal
Cost (MC). We can also say that beyond this point, if producers’ produces goods and services then
he starts loosing MR therefore we can say that:Produces equilibrium is established when firm maximises its profit & minimises its losses.
The following condition is necessary for establishing equilibrium: 1. MC = MR
So long as benefit is greater than cost, or MR Is greater than MC, it is profitable to produce more.
The equilibrium is not achieved because it is possible to add to profit by producing more units.
When MC = MR, the benefit is equal to cost, the producers is its equilibrium subject to that MC
becomes greater than MR beyond this level of output.
For example
In terms of
8
8
8
8
output TR
2
3
4
5
MR
16
24
32
40
MC
8
8
8
8
Profit
8
6
8
10
Level of profit maximum
Diagram 2
Producer’s Equilibrium when MC = MR
3.1 Supply
Supply: - The total amount of product i.e. good or services available for purchase at any specified
price is called as Supply.
Market Supply – It refers to amount of some product which the producers are willing and are able to
sell at a given price keeping other related factors constant.
Market Supply focuses primarily on the one to one relation between Supply Price and Quantity
Supplied. It can be shown diagrammatically as:
Diagram- 3
Market Supply
It is a positive sloped curve that exhibits that quantity supplied at higher price is more than the
quantity supplied at lower price.
3.2 Market Supply: Market Supply is the combined supply of every seller in the market. It is
derived by adding the quantity supplied by each seller at different price. It operates according to the
law of supply i.e. upward sloping Curve or we can say that for higher price the quantity supplied by
all sellers in the market combined is greater than the quantity supplied for lower Prices.
3.3
Determinants of supply
There are many factors and circumstances that could affect supply of the product:
1. Price of the commodity: - The price of the commodity affects the supply of the commodity.
Increase in price will increase the quantity supplied at a given point of time. There is a direct
relationship between price and quantity supplied.
2. Price of related goods – Generally related goods refers to goods from which inputs are
derived to be used in the production of primary goods. The prices of such goods also affect
the price of commodity produced.
3. Conditions / Technology used in production – There is a direct relation between the
technological advancement, goods production, and supply. It means that as the use of
technology increases there will be an increase in production and also the supply of goods.
4. Seller’s expectations – Expectations of sellers concerning future market condition can
directly affect supply. For e.g. If a seller believe that the demands of product ‘A’ will
increase in future then the firm owner may immediately increase production. In such
condition the supply curve will shift upwards.
5. Cost of production – If the cost of production which includes cost of land, labour, energy
and raw material rises then the seller may reduce his supply and the seller may charge extra
for each unit of unit.
3.4 Exceptions to the Law of Supply
As Supply is defined as the quantity that a firm is willing to sell at given price and at a given time
and various factors like own price, Cost of Production, Production Techniques, Price of related
Commodities, Rate of Taxation and Goals of a firm, but there are certain exceptions to the Law of
Supply as there are some goods that do not follow the Law of Supply and hence negate some of
assumptions.
1. Expectations of future change in price: It is normal for any firm to supply more when the
price increases ,but when a supplier anticipates that the price will rise in future he will
restrict supply in the hope of making more profits in future in the anticipation .Hence even if
the price rises ,the firm restrains its present supply.
2. High Quality goods, antiques/ rare commodities: These are also the exceptions to the Law
of Supply .For a creative work like Painting, the higher price of painting may not work as an
inspiration. He/her may need other reasons of inspiration. Antiques are also limited in
quantity and hence supply does not increase as the price of commodity increases.
Check Your Progress
1. Using the Marginal Cost- Marginal approach find the Profit Maximisation level of output
from the table given below.
Output (in units)
Price (Rs)
Average Total Cost (Rs)
7
20
4
8
19
5
9
18
6
10
17
7
2. What change in Total Revenue will result in
(i) Decrease in Marginal Revenue and
(ii) An increase in Marginal Revenue?
3. What will be the effect of the following changes in Total Revenue on Marginal Revenue?
(i) Total Revenue increase at a decreasing rate
(ii) Total Revenue increased at a constant rate
4. Explain the relationships between TR, AR and MR with the help of a diagram when price is
reduced as output sold increases.
5. Describe the impact of an increase in Petrol prices to the supply of transport services. Use a
diagram to explain your answer.
6. Explain three factors that influence the supply of mobile phones in the market.
Summary
The Concept of Revenue that describes the earning of the firm that it receives by selling its
output at a given point of time. Types of Revenue have also been explained in terms of Total
Revenue (TR) which is total amount received by the firm during a specific period; Average
Revenue (AR)which is the revenue generated per unit of output; and Marginal Revenue
(MR) which is increase in revenue by selling one additional unit of output. The material also
talks about the relationship between TR, AR and MR and computation of these by using the
formulae such as:
(i)
TR = P x Q
(ii)
AR=TR
q
(iii)
MR=
Change in Total Revenue
---------------------------------Change in Quantity
Producers’ Equilibrium has also been elaborated in terms of MR and MC, that if a firm produces
beyond the level of equilibrium than it starts incurring loses. The concept of Supply i.e. the total
amount of product available for purchase at any specified price; Market supply is the combined
supply of every seller in the market. Major Determination of supply such as Price of the commodity,
Price of related goods ,Conditions / Technology used in production, Seller’s expectations, Cost of
production have also been discussed. Exceptions to the Law of Supply: Expectations of future
changes in price and high Quality goods, antiques, rare commodities do not follow the assumptions
of law of supply.
Technical Terms
1. Total Revenue (TR): Amount of money a firm receives when it sells a given level of output.
2. Average Revenue (AR): It is the per unit price of the commodity. AR is downward sloping
indicating that in order to increase the sale of the firm, it needs to reduce the per unit price
of commodity. AR is obtained by dividing Total Revenue by the total number of units sold at
a given point of time. AR curve is also the Demand Curve faced by the firm.
3. Marginal Revenue (MR): It is the additional revenue earned by a firm when it sells an
additional unit of output.
4. Producer’s Equilibrium: It is defined as the level of output that maximises the profits of the
firm. The equilibrium condition of a producer’s Equilibrium is Marginal Revenue+ Marginal
Cost.
5. Break Even Point: The level of output at which the firm neither makes loss nor profit. Its
revenue covers for all costs, including normal profit.
6. Supply: It is defined as the quantity that a firm is willing to sell at a given price and at a given
time.
7. Market supply: It is obtained from the horizontal summation of supply of individual firms. It
is affected by all factors that influence individual supply and the number of firms in the
market.
Additional Support Material.
In order to teach effectively in the classroom for better comprehension of concepts by students, the
following web links, PPT (Power Point Presentation), e-books, even video clipping supporting the
concepts are also given for facilitating better Teaching- Learning Process.
1 URL:
Free Market Economy
http://www.youtube.com/watch?v=4YwUnjqsIQM
Market Economy Vs Planned Economy
http://www.youtube.com/watch?v=6q3zjyG8Dpg&NR=1
Four Market Structures Simulation
http://www.youtube.com/watch?v=KGrmnynjHjI
Budget Constraints ands Demand
http://www.youtube.com/watch?v=avOqv5wTNAU
ACN Video- U.S. Energy Natural Gas & Electricity Services
http://www.youtube.com/watch?v=eKzad5FSVW4
Episode 25- Market Structures
http://www.youtube.com/watch?v=9Hxy-TuX9fs
Graph the Supply Curve
http://www.youtube.com/watch?v=T3ZvnqjvzA0
Introduction to Microeconomics 101
http://www.youtube.com/watch?v=gfiQ1xZfqV4
Lecture 19 - Chap 9 - oligopoly.wmv
http://www.youtube.com/watch?v=6G_awGuSra4
Mrs Tan, Mr Lee and the Price Elasticity of demand
http://www.youtube.com/watch?v=96KXjOPkF3M
Opportunity Cost
http://www.youtube.com/watch?v=ezOdQUzLVAo
Price Elasticity of Supply Jonathan Yap Howard Sun David Jiang
http://www.youtube.com/watch?v=K_2DQHcyJTw
Price Elasticity of Supply
http://www.youtube.com/watch?v=20b_zVHmZG0