Types of Revenue

Meaning

• Total Revenue is the total income a firm earns by selling its output.
• It is equal to the price per unit multiplied by the number of units sold.

Formula

TR = P × Q

Where:

• P = price per unit

• Q = quantity of output sold

Example

• A shop sells notebooks at ₹100 each.
• If it sells 20 notebooks:
  TR = 100 × 20 = ₹2000
• So, the total income from selling 20 notebooks is ₹2000.

Meaning

• Average Revenue is the revenue earned per unit of output sold.
• It is equal to total revenue divided by the number of units sold.
• For a firm, AR is the same as the price per unit.

Formula

\[AR=\frac{TR}{Q}\]

Since TR = P × Q,

\[AR=\frac{P\times Q}{Q}=P\]

So, AR = Price.

Example

• Suppose total revenue from selling 20 notebooks is ₹2000.
  \[AR=\frac{TR}{Q}=\frac{2000}{20}=\mathrm{र}100\text{ per notebook}\]
• This is the same as the price per notebook.

Important point

• Because AR is equal to price, the AR curve of a firm is also its demand curve.
• As more units are sold, the price usually has to be reduced, so AR generally falls when output increases.

Meaning

• Marginal Revenue is the additional revenue a firm earns by selling one more unit of output.

Formula (discrete units)

For the nth unit:

MR_n = TR_n − TR_n−1

Where:

• TR_n = total revenue from selling n units
• TR_n−1 = total revenue from selling (n − 1) units

General formula

\[MR=\frac{\Delta TR}{\Delta Q}\]

• When output changes by 1 unit, MR is just the change in TR when one more unit is sold.

Example

• Suppose TR from 4 notebooks is ₹100 and from 5 notebooks is ₹110.
  MR₅ = TR₅ − TR₄ = 110 − 100 = ₹10
• So, the 5th notebook adds ₹10 to total revenue.

Observations

• As price (and AR) falls from 10 to 1, quantity sold rises from 1 to 10 units.
• TR increases from 10 to 30 as output increases from 1 to 5 units.
• TR becomes constant at 30 for 6 units and then falls when output increases further (7, 8, …).
• MR decreases as more units are sold:
  1. MR is positive up to the 5th unit.
  2. MR is zero at the 6th unit.
  3. MR is negative from the 7th unit onwards.
• When MR is zero (at 6 units), TR is at its maximum.
• When MR is negative, TR starts falling.
• At every output level, MR is less than AR, and it falls faster than AR.

• TR is the total income from all units sold.
• AR is revenue per unit and is equal to price, so the AR curve is the demand curve of the firm.
• MR is extra revenue from selling one more unit.
• When AR falls, MR also falls and is less than AR at each output level.
• TR increases as long as MR is positive, is maximum when MR = 0, and falls when MR is negative.
• MR can be positive, zero or negative, but AR (price) is normally always positive.