Concept of Revenue

B) Revenue Concepts :

The term ‘revenue’ refers to the receipts obtained by a firm from the sale of certain quantities of a commodity at given price in the market. The concept of revenue relates to total revenue, average revenue and marginal revenue.

1) Total Revenue (TR) :

Total revenue is the total sales proceeds of a firm by selling a commodity at a given price. It is the total income of a firm. Total revenue is calculated as follows :

Total revenue = Price × Quantity
For example, if a firm sells 15 units of a commodity at ₹200 per unit TR is calculated as :
TR = P × Q
= ₹200 × 15
= ₹3000

2) Average Revenue (AR) :

Average revenue is the revenue per unit of output sold. It is obtained by dividing the total revenue by the number of units sold.

"AR"="TR"/"TQ"

AR = Average Revenue
TR= Total Revenue
TQ =Total Quantity

For example, if the total revenue of 15 units, is ₹3000, then average revenue is calculated as :

"AR"="TR"/"TQ"

=3000/15

=₹200

3) Marginal Revenue :

Marginal revenue is the net addition made to total revenue by selling an extra unit of the commodity.

MRn = TRn  – TRn-1
MRn  = Marginal revenue of nth unit
TRn  = Total revenue of nth unit
TRn-1 = Total Revenue of previous units
n = Number of units sold
For example, if the previous total revenue from the sale of 20 tables is ₹4000 and that from the sale of 21 tables is ₹4200, marginal revenue is calculated as :

MRn = TRn  – TRn-1
=4200-4000
= ₹200 per table

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