Economics notes chapter revenue

Revenue
Revenue refers to the amount received by a firm from the sale of a given quantity of a commodity in the
market.
Total Revenue (TR)
Total revenue refers to total receipts from the sale of a given quantity of a commodity.
TR = Quantity × Price
Average Revenue (AR)
Average revenue refers to revenue per unit of output sold.
AR = TR / Quantity = Price
AR curve and demand curve are the same.
Marginal Revenue (MR)
Marginal revenue is the additional revenue generated from the sale of an additional unit of output.
MR■ = TR■ – TR■■■
Another formula: MR = ∆TR / ∆Q
Relationship between AR & MR (when price remains constant)
Units Sold | Price/AR | TR | MR
1|5|5|5
2 | 5 | 10 | 5
3 | 5 | 15 | 5
4 | 5 | 20 | 5
5 | 5 | 25 | 5
Relationship between AR & MR (when price remains constant)
• Equal to Price – Both AR and MR are equal to the price of the product in perfect competition because
firms are price takers.
• Horizontal Demand Curve – The demand curve faced by an individual firm is perfectly elastic, implying
AR = MR = Price.
• Constant AR and MR – Since the price remains constant regardless of the quantity sold, AR and MR
do not change with output.
Additional Observations
• As long as MR is positive, TR increases.
• When MR is zero, TR is at its maximum.
• When MR becomes negative, TR starts falling.
Example:
Units Sold | TR | AR | MR
1 | 20 | 20 | 20
2 | 36 | 18 | 16
3 | 48 | 16 | 12
4 | 56 | 14 | 8
5 | 60 | 12 | 4
6 | 60 | 12 | 0
7 | 56 | 8 | –4
General Relationship between AR & MR
• AR increases as long as MR is higher than AR.
• AR is maximum and constant when MR = AR.
• AR falls when MR < AR.
Relationship between TR & MR (when price falls with rise in output)
Units Sold | Price/AR | TR | MR
1|5|5|5
2|4|8|3
3|3|9|1
4 | 2.25 | 9 | 0
5 | 1 | 5 | –4
Relationship between TR & Price Line