Economics » Theory of Costs and Revenue » The Concept of Revenue

The Concepts of Revenue

Revenue refers to the receipts from the sale of a firm’s output. It is earned immediately a firm sells a given quantity of its output.

Total Revenue (TR):

Total Revenue (TR) refers to the total receipts from the sale of a given quantity of a firm’s output. It is found by multiplying price (P) by the corresponding quantity (Q) sold by the firm.

TR = PQ

Average Revenue (AR):

Average Revenue (AR) is the revenue per unit of output sold. It is found by dividing the Total Revenue (TR) by the quantity sold (Q) i.e.

\(\text{AR}=\cfrac{\text{TR}}{\text{Q}}\)

But, TR = PQ.

Therefore, \(\text{AR}=\cfrac{\text{PQ}}{\text{Q}}=\text{P}\)

This means that Average Revenue (AR) is the same as price (P).

Marginal Revenue (MR):

Marginal Revenue (MR) is the change in total revenue with respect to a change in the quantity sold. That is, the change in total revenue that results from the sale of one extra unit of the commodity. It is found by dividing the change in total revenue \(\Delta \text{TR}\) by the change in the quantity sold \(\Delta \text{Q}\).

\(\text{MR}=\cfrac{\Delta \text{TC}}{\Delta \text{Q}}\)

Where:

\(\Delta \text{TR}\) = change in TR = New TR – Old TR

\(\Delta \text{Q}\) = change in Q = New Q – Old Q.

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  • I have a question, Marginal revenue which is found by dividing the change in total revenue ΔTR by the change in the quantity sold ΔQ, why then does the equation uses ΔTC and not ΔTR?