Total, Average and Marginal Revenues

A closer look at Table 6.1 shows that $TR$ does not rise by the same amount for every extra unit. The first unit raises $TR$ from 0 to Rs 9.50 (a rise of Rs 9.50); the 5th unit raises it by only Rs 5.50 (Rs 37.50 − Rs 32). After 10 units $TR$ starts to fall, so the 12th unit changes $TR$ by $48 - 49.5 = -1.5$, a fall of Rs 1.50.

This change in total revenue from selling one more unit is the marginal revenue ($MR$), shown in the last column of Table 6.1. The $MR$ at any quantity is the difference between the $TR$ at that quantity and the $TR$ at the previous quantity — for example, at $q = 3$, $MR = 25.5 - 18 = 7.5$. Formally,

As quantity rises, $MR$ falls; once quantity passes 10 units, $MR$ becomes negative. In Fig. 6.2 the $MR$ is drawn as the dotted line that cuts the horizontal axis at $q = 10$.

Graphically, the value of $MR$ is given by the slope of the tangent to the TR curve at that output (Fig. 6.4). At point 'a' the tangent $L_1$ is steep and positive; at point 'b' the tangent $L_2$ is flatter (smaller positive slope); at the peak (10 units) the tangent is horizontal, so $MR = 0$; and on the falling arm (point 'd') the tangent is negatively sloped, so $MR < 0$. We conclude that when total revenue is rising, marginal revenue is positive, and when total revenue falls, marginal revenue is negative.

Relation between the AR and MR curves …