When a firm undertakes the task of production and purchases inputs it incurs cost. Having produced the output, on selling it the firm earns some income. The income receipt by way of sale proceeds is the revenue of the firm. We can study the concept of revenue by distinguishing between total revenue, average revenue and marginal revenue.
Total Revenue (TR)
Total revenue is the sale-proceeds or the aggregate receipts obtained by the firm for selling its product. Each unit of output sold in the market fetches a price and when this price is multiplied by the number of units sold we obtain the total revenue. Thus the total revenue depends on two factors:
- The price of the product (P)
- The units of output sold (Q)
Total Revenue = Price x Quantity sold or,
TR = P x Q
For example, if the price of one text book is 100$ and the publisher sells 2000 units then the total revenue of the publisher is 100 X 2000 = 2,00,00 $
Average Revenue (AR)
Average Revenue is the revenue derived by the firm per unit of its output sold. It is obtained by dividing the total revenue by the number of units of output sold.
Average Revenue = Total Revenue / Output sold
AR = TR / Q
Now, TR = P x Q
AR = P x Q / Q
AR = P
Thus, average revenue is nothing but the price of the product.
Marginal Revenue (MR)
Marginal revenue is the additional revenue from selling additional unit of output. For instance when a firm sells 10 units of mobile phones and earns 5000 $ as total revenue and on selling 11 units of mobile phones earns 5500$ as total revenue then the 11th mobile phone gets 500$ for the firm. This additional 200$ for the 11th mobile phone is the marginal revenue of the firm. Thus the Marginal Revenue of the 11th unit is obtained by subtracting from Total Revenue of 11 units, the total revenue of earlier ten mobile phones. In other words if;
MR11th represents Marginal Revenue of 11th unit
TR11 represents Total Revenue of 11 mobile phones
TR11-1 represents Total Revenue of 10 mobile phones,
MR11th = TR11 – TR11-1
we can generalize this formula for any extra units “n” viz.
MRnth = TRn – TRn-1
This formula is applied only when there is unit change in sale of the output, i.e. the number of mobile phones sold has been increased from 10 to 11, but if the amount of change is more than one at a time then we used the following formula to calculate marginal revenue.
MR = ΔTR / ΔDQ