Concepts of Revenue

In economics, revenue refers to the total amount of money a firm receives from the sale of its goods or services. To understand how a firm maximizes profit, we must analyze three key concepts: Total Revenue (TR), Average Revenue (AR), and Marginal Revenue (MR).

Total Revenue

Definition: The total income earned by a firm from selling a given quantity of output.

Formula: $TR = P × Q$

where:

$P\$= Price per unit

$Q\$= Quantity sold

Example: If a firm sells 100 units at ₹50 each,  $TR=50×100=₹ 5,000$.

Average Revenue

Definition: It is revenue earned per unit of output sold.

Formula: $AR = \frac{TR}{Q}$ $= P$

(Since $TR=P×Q, \ AR=P$ under perfect competition, where price is constant)

Example: If $TR= ₹ 5,000$ for 100 unites, $AR=\frac{5,000}{100}=₹ 50$.

Key insight:

In Perfect Competition, $AR=P$ (price is constant)

In Imperfect Competition (e.g., monopoly), $AR$ declines as output increases because the firm must lower prices to sell more.

Marginal Revenue

Definition: Additional revenue earned from selling one more unit of output

Formula: $MR=\frac{\triangle TR}{\triangle Q}$, i.e., Change in total revenue as quantity changes.

Example: If selling the 101st unit increases $TR$, from $₹ 5,000$ to $₹ 5,040$, then $MR=₹ 40$.

Key insight:

In Perfect Competition, $MR=P$ (since price is constant).

In Imperfect Competition, $MR<AR$ (because the firm must reduce price to sell more, affecting all units).