Revenue Types: Total, Average and Marginal Revenue!

Revenue Types: Total, Average and Marginal Revenue
Revenue Types: Total, Average and Marginal Revenue!

The term revenue refers to the income obtained by a firm through the sale of goods at different
prices. In the words of Dooley, ‘the revenue of a firm is its sales, receipts or income’.
The revenue concepts are concerned with Total Revenue, Average Revenue and Marginal
Revenue.
1. Total Revenue:
The income earned by a seller or producer after selling the output is called the total revenue. In
fact, total revenue is the multiple of price and output. The behavior of total revenue depends on
the market where the firm produces or sells.
“Total revenue is the sum of all sales, receipts or income of a firm.” Dooley
Total revenue may be defined as the “product of planned sales (output) and expected selling
price.” Clower and Due
“Total revenue at any output is equal to price per unit multiplied by quantity sold.” Stonier and
Hague
2. Average Revenue:
Average revenue refers to the revenue obtained by the seller by selling the per unit commodity. It
is obtained by dividing the total revenue by total output.
“The average revenue curve shows that the price of the firm’s product is the same at each level
of output.” Stonier and Hague
3. Marginal Revenue:
Marginal revenue is the net revenue obtained by selling an additional unit of the commodity.
“Marginal revenue is the change in total revenue which results from the sale of one more or one
less unit of output.” Ferguson. Thus, marginal revenue is the addition made to the total revenue
by selling one more unit of the good. In algebraic terms, marginal revenue is the net addition to
the total revenue by selling n units of a commodity instead of n – 1.
Therefore,
Total Revenue, Average Revenue and Marginal Revenue:

The relation of total revenue, average revenue and marginal revenue can be explained with the
help of table and fig.
Table Representation:
The relationship between TR, AR and MR can be expressed with the help of a table 1.
From the table 1 we can draw the idea that as the price falls from Rs. 10 to Re. 1, the output sold
increases from 1 to 10. Total revenue increases from 10 to 30, at 5 units. However, at 6th unit it
becomes constant and ultimately starts falling at next unit i.e. 7th. In the same way, when AR
falls, MR falls more and becomes zero at 6th unit and then negative. Therefore, it is clear that
when AR falls, MR also falls more than that of AR: TR increases initially at a diminishing rate, it
reaches maximum and then starts falling.
The formula to calculate TR, AR and MR is as under:

TR = P x q
Or TR = MR1 + MR2 + MR3 + MR3 +….. MR„
TR
AR = TR/q MR = TRn – TRn _ x

In fig. 1 three concepts of revenue have been explained. The units of output have been shown on
horizontal axis while revenue on vertical axis. Here TR, AR, MR are total revenue, average
revenue and marginal revenue curves respectively.
In figure 1 (A), a total revenue curve is sloping upward from the origin to point K. From point K
to K’ total revenue is constant. But at point K’ total revenue is maximum and begins to fall. It
means even by selling more units total revenue is falling. In such a situation, marginal revenue
becomes negative.
Similarly, in the figure 1 (B) average revenue curves are sloping downward. It means average
revenue falls as more and more units are sold.
In fig. 1 (B) MR is the marginal revenue curve which slopes downward. It signifies the fact that
MR with the sale of every additional unit tends to diminish. Moreover, it is also clear from the
fig. that when both AR and MR are falling, MR is less than AR. MR can be zero, positive or
negative but AR is always positive.
Profit Maximisation
 An assumption in classical economics is that firms seek to maximise profits.

 Profit = Total Revenue (TR) – Total Costs (TC).
 Therefore, profit maximisation occurs at the biggest gap between total revenue and total
costs.
 A firm can maximise profits if it produces at an output where marginal revenue (MR) =
marginal cost (MC)
Diagram of Profit Maximisation
To understand this principle look at the above diagram.
 If the firm produces less than Output of 5, MR is greater than MC. Therefore, for this
extra output, the firm is gaining more revenue than it is paying in costs, and total profit
will increase.
 At an output of 4, MR is only just greater than MC; therefore, there is only a small
increase in profit, but profit is still rising.
 However, after the output of 5, the marginal cost of the output is greater than the
marginal revenue. This means the firm will see a fall in its profit level because the cost of
these extra units is greater than revenue.
Profit maximisation for a monopoly
 In this diagram, the monopoly maximises profit where MR=MC – at Qm. This enables
the firm to make supernormal profits (green area). Note, the firm could produce more and
still make normal profit. But, to maximise profit, it involves setting a higher price and
lower quantity than a competitive market.
 Note, the firm could produce more and still make a normal profit. But, to maximise
profit, it involves setting a higher price and lower quantity than a competitive market.
 Therefore, in a monopoly profit maximisation involves selling a lower quantity and at a
higher price. see also: Diagram of monopoly
Profit Maximisation in Perfect Competition
In perfect competition, the same rule for profit maximisation still applies. The firm maximises
profit where MR=MC (at Q1).
For a firm in perfect competition, demand is perfectly elastic, therefore MR=AR=D.
This gives a firm normal profit because at Q1, AR=AC.

Revenue Types: Total, Average and Marginal Revenue!

Uploaded by

Copyright:

Available Formats

Revenue Types: Total, Average and Marginal Revenue!

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Revenue Types: Total, Average and Marginal Revenue!

Uploaded by

Copyright:

Available Formats

Revenue Types: Total, Average and Marginal Revenue

Revenue Types: Total, Average and Marginal Revenue!

Total Revenue, Average Revenue and Marginal Revenue:

The formula to calculate TR, AR and MR is as under:

AR = TR/q MR = TRn – TRn _ x

 An assumption in classical economics is that firms seek to maximise profits.

This gives a firm normal profit because at Q1, AR=AC.

You might also like