Significance of Revenue Curve

• Aim of the firm: To maximise profit.
• General condition of equilibrium (for all market structures):
  A profit‑maximising firm is in equilibrium where MR = MC.

Explanation:

• If MR > MC, producing one more unit adds more to revenue than to cost, so profit can still increase.
• If MR < MC, producing more adds more to cost than to revenue, so profit falls.
• Therefore, profit is maximised (or loss is minimised) at the output level where MR = MC.

A firm may earn supernormal profit or normal profit or may incur loss. Revenue curves help in measuring this.

1] Total profit or loss

• Total Profit = TR − TC.
• By comparing the TR curve with the TC curve at different output levels, the firm can find the level of output where total profit is maximum.

2] Profit or loss per unit

• Profit (or loss) per unit = AR − AC.
• Cases:
  (i) AR > AC → Supernormal (abnormal) profit per unit.
  (ii) AR = AC → Normal profit (zero economic profit).
  (iii) AR < AC → Loss per unit.

Thus, by comparing AR with AC at the equilibrium output, the firm can check whether it is earning supernormal profit, just normal profit, or sustaining losses, and by how much per unit.

Revenue curves also help to judge whether the firm is using its plant capacity fully.

• Full capacity use:
  1. When AR is tangent to AC at the minimum point of AC, the firm is producing at the full capacity of its plant and earns only normal profit.
  2. This is the typical long‑run situation under perfect competition.
• Less than full capacity (excess capacity):
  1. Under imperfect competition (monopoly, monopolistic competition), AR usually cuts AC before the minimum point of AC.
  2. In this case, the firm produces at less than full capacity; some capacity remains idle.

The ideas of AR and MR are also applied to the pricing of factors of production (land, labour, capital, and entrepreneur).

• Average Revenue Product (ARP): Revenue per unit of a factor (e.g., per worker).
• Marginal Revenue Product (MRP): Extra revenue received by employing one more unit of a factor.

Key use:

• ARP and MRP curves are generally inverted U‑shaped.
• A firm employing a factor (say labour) to maximise profit will hire the factor up to the point where:
  MRP of the factor = Factor price (wage, rent, interest, etc.).

Thus, AR and MR concepts, in the form of ARP and MRP, help in deciding how many units of a factor to employ and what payment is justified.

Example: A small mobile‑cover manufacturer

• The firm increases output from 100 to 300 covers per day. As output increases, total revenue (TR) goes up because more covers are sold.
• Initially, each extra cover adds a lot to TR (MR is high). Later, to sell more covers, the firm may have to reduce the price, so MR falls.
• The firm compares the extra revenue (MR) from each additional cover with the extra cost (MC) of producing it.
• The best level of output is where MR = MC. At this level:
  The difference between TR and TC is maximum, so profit is highest.
  If the firm cannot cover all costs, this point still gives the smallest possible loss.

This shows how revenue curves guide a real producer in deciding “how much to produce”.

• Revenue curves (TR, AR, MR) help determine the equilibrium output and the profit or loss of a firm.
• A profit‑maximising firm is in equilibrium where MR = MC.
• If AR > AC → supernormal profit; AR = AC → normal profit; AR < AC → loss.
• Full capacity is reached when AR is tangent to AC at the minimum point of AC (typical long‑run perfect competition).
• In factor markets, AR and MR appear as ARP and MRP and help decide how many units of a factor to employ and what factor payment is appropriate.