Concepts of Revenue

Revenue is one of the most fundamental concepts in economics and forms the basis for understanding how firms earn income from selling goods and services. It helps determine profitability, pricing decisions, and overall market performance. Revenue refers to the income a producer receives from the sale of output. It is the monetary return obtained from selling a certain quantity of goods at a particular price.

In simple terms, revenue is the amount a firm earns before deducting any costs or expenses. Understanding revenue and its components helps in analyzing business efficiency and predicting how changes in price or output affect income.

There are three main types of revenue: Total Revenue (TR), Average Revenue (AR), and Marginal Revenue (MR). These concepts are closely related but differ in how they measure a firm's earnings.

Total Revenue

The total receipts from the sale of a given quantity of a commodity are known as Total Revenue. In simple terms, Total Revenue is the total income of a firm and is determined by multiplying the quantity of the commodity sold by its price. The formula for Total Revenue is,

Total Revenue = Quantity x Price

When the price of a product remains constant, total revenue increases proportionally with the number of units sold. However, if the price changes with output (as in imperfect competition), TR may rise at a decreasing rate or eventually fall.

Illustration

Here, since price remains constant, TR increases at a constant rate. Under perfect competition, TR is a straight line rising proportionally with quantity sold.

Average Revenue

The revenue per unit of the output sold of a commodity is known as Average Revenue. It is determined by dividing the Total Revenue by the number of units sold of a commodity. The formula for Average Revenue is,

For example, if the Total Revenue of a firm is ₹20,000 by selling 100 tables, then the Average Revenue will be, 

Average Revenue (AR) and Price are the same

As we know, Average Revenue is the per unit sales receipt of a commodity and price is always per unit. Now, as the sellers receive revenue based on the price of the commodity, Price and Average Revenue are one and the same thing.

Explanation:

TR = Quantity x Price ......................... (1)

.......................... (2)

Now, by putting the value of (1) in (2), we get

AR = Price

Illustration

Marginal Revenue

The additional revenue generated by selling an additional unit of output is known as Marginal Revenue. In simple terms, it is the change in Total Revenue from the sale of one more unit of a commodity. The formula for Marginal Revenue is,

MR_n = TR_n - TR_n-1

Where,

• MR_n = Marginal Revenue of the n^th unit
• TR_n= Total Revenue from n units
• TR_n-1= Total Revenue from n-1 units
• n = Number of units sold

Illustration

One more way to calculate MR

As we already know, Marginal Revenue is the change in TR when one more unit of the output is sold. However, when the change in units of output sold is more than one, then the previous formula can be difficult to use. In those cases, MR can be determined by using the following formula:

Note

Slope of Total Revenue Curve is represented by Marginal Revenue. It is because 

TR is the summation of MR

Another way to calculate TR is by adding the Marginal Revenues of all the units sold. In simple terms, another formula for determining TR is,

TR_n = MR₁ + MR₂ + MR₃ + ...................+MR_n

OR

TR = ∑MR

Distinction Between TR, AR, and MR

Numericals on Concepts of Revenue

Question 1: A firm sells its product at a constant price of ₹10 per unit in a perfectly competitive market.

Calculate TR, AR, and MR.

Solution

We know that,

Total Revenue (TR) = Price × Quantity
Average Revenue (AR) = TR / Quantity
Marginal Revenue (MR) = Change in TR / Change in Quantity

Question 2: A bakery sells pastries. When it sells 30 pastries, its Total Revenue is ₹600. After increasing the output to 31 pastries, its Total Revenue becomes ₹624.
Calculate:
a) Average Revenue at 30 pastries
b) Marginal Revenue from the 31^st pastry

Solution

We know that,

Average Revenue (AR) = TR / Q
AR at 30 pastries = 600 / 30 = ₹20

Marginal Revenue (MR) = Change in TR / Change in Q
MR from 31st pastry = (624 − 600) / (31 − 30) = ₹24

Question 3: A seller charges ₹30 per unit for the first 40 units of a product. For every unit sold beyond 40, the seller offers a discount and charges ₹25 per unit.
If the buyer purchases 60 units, calculate the Total Revenue (TR) and Average Revenue (AR).

Solution

Revenue from first 40 units:

TR₁=40×30=₹1,200

Remaining units = 60 − 40 = 20 units

Revenue from remaining 20 units:

TR₂=20×25=₹500

Total Revenue (TR):

TR=TR₁+TR₂

1,200 + 500 = ₹1,700TR

Average Revenue (AR):

AR = TR/Q = 1,700/60 = ₹28.33

So, Total Revenue = ₹1,700 and Average Revenue ≈ ₹28.33 per unit

Question 4: A store normally sells a backpack for ₹900 and sells 40 backpacks in a day. To attract more customers, the shopkeeper offers a flat ₹100 discount and sales increase to 54 backpacks.

Calculate:
a) Total Revenue before discount
b) Total Revenue after discount
c) Change in Total Revenue
d) Whether the discount increased or decreased revenue

Solution

(a) Total Revenue before discount

Price per backpack = ₹900
Quantity sold = 40

TR = 900×40 = ₹36,000

(b) Total Revenue after discount

Discount = ₹100
New price = 900 − 100 = ₹800
Quantity sold = 54

TR after discount = 800×54 = ₹43,200

(c) Change in Total Revenue

Change in TR=TR after discount − TR before discount
= 43,200−36,000
= ₹7,200

(d) Whether revenue increased or decreased

Since Total Revenue increased by ₹7,200, the discount increased the revenue.

Related Articles:

• Relationship between Revenues (AR, MR and TR)
• Difference between Revenue and Profit