Page 228 - DECO401_MICROECONOMIC_THEORY_ENGLISH

Unit-11: Concepts of Revenue

11.1 What is Revenue? Notes

Suppose that you have a factory to make ice cream. You made 1000 ice creams daily. You have earned
1,000 by selling these ice creams. In economics, this 1,000 is called your income. Thus, by selling a
product whatever a firm earns, is the revenue of that firm. According to Dooley, “The revenue of a
firm is its sales, receipts or income.” To know your total income, we just need to multiply the selling
quantity of ice cream into the cost of ice cream. We can assume total demand from market demand
table. The three assumptions of income are as follows:

Total Revenue

Total revenue is called the money which is earned by a firm after selling a fixed quantity of product.
For example, if on 5 a product has sold its 6 units, then total income is 5 ´ 6 = 30. To get total
revenue, either we can multiply the average revenue with selling quantity or add all the marginal units.
Means

TR = P × Q or TR = ∑MR

(Here TR = Total Revenue; P = Price; Q = Qauntity; ∑ = Sign of Summation; MR = Marginal Revenue)

Average Revenue

Average Revenue is the term which is nothing but price per unit. Means the price of product and
average revenue are same. It means the average revenue is defined as per unit revenue of product.
According to McConnell, “Average revenue is the per unit revenue received from the sale of one unit
of commodity.” Average revenue is the ratio of total revenue from selling quantity of product. The
average revenue can be got by division of total selling quantity by total revenue.

TR
_____
___

AR = = P×Q = P

Q Q
(Here AR = Average Revenue; TR = Total Revenue; Q = Selling Quantity; P = Price)
So the meaning of average revenue is price of product. If we get 30 by selling 6 units of product then
average revenue or price would be 30 ÷ 6 = 5.
Marginal Revenue
Marginal revenue is nothing but the difference of total revenue of product by selling one more or one
less product. According to Ferguson, “Marginal Revenue is the change in total revenue which results
from the sale of one more or one less unit of output.”
—Ferguson
To know marginal revenue, either we can divide the change in total revenue (∆TR) from change in
product quantity (∆Q) or by subtracting total revenue of n products from the total revenue of n – 1
products.

Change in Total Revenue/Income ∆TR

MR = _______________________________ = ____

Change in Quantity Sold ∆Q
or MR = TRn – TR
n–1

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