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Chapter: 11th 12th std standard Indian Economy Economic status Higher secondary school College

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Measurement of Profit

Measurement of Profit
A firm's profit may be defined as the difference between its total revenue and its total cost i.e. Profit = Total Revenue - Total Cost

Measurement of Profit

 

A firm's profit may be defined as the difference between its total revenue and its total cost i.e. 

Profit = Total Revenue - Total Cost

 

The aim of any firm is to maximise its profit i.e. to maximise the positive difference between the Total Revenue (TR) and Total Cost (TC). At that point the producer will be in equilibrium.


Table Maximising Profits                        

Output (units)      Total Revenue(Rs)         Total Cost (Rs)    Total Profit(Rs)

                            

1        40      45      -5

2        80      70      10

3        130    90      40

4        175    105    70

5        210    130    80

6        240    155    85

7        265    200    65

8        285    255    30

9        290    270    20

10      300    310    -10

                            

 

From Table it can be understood the firm will earn maximum profit of Rs 85 when it produces 6 units of output. Thus the firm will be in equilibrium by producing 6 units of output.



Total Revenue

 

Total Revenue refers to the total amount of money that a firm receives from the sale of its products.

Mathematically TR = PQ where TR = Total Revenue; P = Price; Q = Quantity sold. Suppose a firm sells 1000 units of a product at the price of Rs 10 each, the total revenue will be 1000 x Rs 10 = Rs 10,000/-

 

Average Revenue

 

Average revenue is the revenue per unit of the commodity sold. It is calculated by dividing the total revenue by the number of units sold.

 

AR = TR / Q Where

 

AR = Average Revenue

 

TR = Total Revenue

 

Q = Quantity sold

Eg: Average Revenue = Rs 10 ,000 / 1000  = Rs 100 / −

 

 

Thus average revenue means price of the product.

 

Marginal Revenue

 

Marginal Revenue is the addition made to the total revenue by selling one more unit of a commodity.

 

For example, if 10 units of a product are sold at the price of Rs 15 and 11 units are sold at Rs14/-, the marginal revenue will be:

 

MRn = TRn - TRn-1

 

    Rs (11x 14) - Rs (10x 15)

 

    Rs 154 - 150

 

    Rs 4/-

 

Relationship between AR and MR curves

 

When the average revenue (price) remains constant, the marginal revenue will also remain constant and will coincide with the average revenue.

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