Concept of Revenue
The concept of revenue forms an important tool for economic analysis. This is the lifeline for the producer of the firm in all market situations. Since revenue of a firm together with its costs determines profits, therefore the study of the concept of revenue is very important.
The revenue of firms is the receipt that it obtains from selling its products. Hence the curve depicting the amounts of revenue that it receives by selling the various quantities of a commodity is called revenue curve. Left witch has termed it as sales curve. Truly speaking, revenue here means sales revenue of the firm.
Similar to costs, revenue has also three main concepts:
Total Revenue (TR) Total Revenue refers to gross revenue, i.e. the total amount of money that the firm receives from the sale of its products.
Total Revenue can be estimated by multiplying the quantity sold by its selling price (or Average Revenue) or in other words, it is the sum total of marginal revenues. Thus,
TR = QXP (or AR)
Or TR = ∑MR
Suppose, quantity sold (Q) = 25 units; Price = Rs. 10. Then, TR = 25×10 = Rs. 250.
Average Revenue (AR) Average Revenue is the total revenue (TR) divided by the quantity sold (Q) or it is the per unit revenue.
AR = QR/Q
Suppose, TR = Rs. 250
Q = 25 units
Then,
AR = 250/25 = 10.
AR curve and Demand Curve are one and the same.
It should also be clear understood that average revenue (AR) and price for the product (P) have the same meaning received by the seller from the sale of the commodity. On the other, price means per unit payment made by the purchaser to purchase the commodity. Since seller receives what the purchaser pays, hence the per unit revenue and per unit price are one and the same thing. In fact what is average revenue from seller’s point of view, the same is the price from buyer’s point of view. Therefore AR and P are one and the same and that is why AR curve and Demand curve for firm’s product are also one and the same.
Marginal Revenue (MR) Marginal revenue is the changes in total revenue resulting from one unit increase in the sales. Marginal revenue can be estimated as the change in total revenue with the sale of n units of a product instead of n-1 units. Thus,
MR = TRn-1
Suppose,
| Quantity sold (Units) | Total Revenue Rs. |
| 25 | 250 |
| 26 | 260 |
Then,
MR = 260 250 = Rs. 10.
Relationship between TR, MR and AR
The relationship between total revenue, average revenue and marginal revenue is explained with the help of following example and diagram:
| Units of output | TR (Rs.) | MR (Rs.) | AR (Rs.) |
| 1 | 200 | 200 | 200 |
| 2 | 360 | 160 | 180 |
| 3 | 480 | 120 | 160 |
| 4 | 560 | 80 | 140 |
| 5 | 600 | 40 | 120 |
| 6 | 600 | 0 | 100 |
| 7 | 560 | -40 | 80 |
| 8 | 480 | -80 | 60 |
It is clear form the example and diagram that TR, MR and AR interrelated. AR and MR curves can also be derived from TR curve through geometrical method.
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