Page 137 - DECO101_MICRO_ECONOMICS_ENGLISH

Micro Economics

Notes 9.3 Linkage between Cost, Revenue and Output through Optimisation

We need to understand the concept of revenue and who it is related to cost. First, let’s discuss the
various types of revenues.

Total Revenue (TR)

Total revenue is the total money received from the sale of any given quantity of output.
The total revenue is calculated by taking the price of the sale times the quantity sold, i.e.
TR = Price × Quantity.

Example: If price is ` 10 and quantity sold is 100, then total revenue would be ` 1000.

Average Revenue (AR)

Average revenue is the revenue received for selling a good per unit of output sold. It is calculated
by dividing total revenue by the quantity of output, i.e.

AR= TR/Quantity
Average revenue often goes by a simpler and more widely used term- price. Using the longer
term average revenue rather than price provides a connection to other related terms, especially
total revenue and marginal revenue. When compared with average cost, average revenue shows

the amount of profit generated per unit of output produced.
Marginal Revenue (MR)

Marginal revenue is the change in total revenue resulting from a change in the quantity of output

sold. Marginal revenue indicates how much extra revenue a firm receives for selling an extra
unit of output. It is found by dividing the change in total revenue by the change in the quantity
of output. Marginal revenue is the slope of the total revenue curve and is one of two revenue
concepts derived from total revenue. The other is average revenue. To maximize profi t, a fi rm
equates marginal revenue and marginal cost.

MR= Change in TR/Change in Quantity
Now in order to have maximum total revenue, two conditions have to be fulfi lled:
The first order derivative or the MR function should be zero.

The second order derivative or the slope of the MR function should be negative

132 LOVELY PROFESSIONAL UNIVERSITY