Revenue is the amount of money that a producer receives for his commodity. It is very important for us to understand the concept of commodity and how it works.
What is Revenue?
The amount of money that a producer gets in exchange for the sale proceeds is known as revenue. Revenue refers to the amount received by a firm from the sale of a given commodity in the market. For example, a firm gets Rs. 16,000 from the sale of 100 chairs, then the amount of Rs. 16,000 is known as revenue.
The concept consists of three terms – Total Revenue, Average Revenue and Marginal Revenue.
Total Revenue (TR)
Total Revenue (TR) refers to the total receipts from the sale of a given quantity of commodity. It is the total income of a firm. TR is obtained by multiplying the quantity of the commodity sold with the price of the commodity.
TR = Quantity (Q) × Price (P)
For example, if a firm sells if a firm sells 10 chairs at the price of Rs. 160 per chair, then the TR will be,
TR = 10×160 = Rs. 1600
Average Revenue (AR)
Average Revenue (AR) refers to revenue per unit output sold. It is obtained by dividing the total revenue by the number of units sold.
AR = TR ÷ Q
For example, if TR from the sale of 10 chairs at Rs. 160 per chair is Rs. 1600, then,
AR = TR÷Q = 1600÷10
AR = Rs. 160
AR curve and price are the same. We know that AR equals to per nit receipts and price is always per unit. Since sellers receive revenue according to price, price and AR are one and the same.
TR = Q×P
AR = TR ÷ Q
Therefore, AR = P
Marginal Revenue (MR)
Marginal Revenue (MR) refers to the additional revenue generated from the sale if a additional unit of output. It is the change in TR from one more unit of commodity.
MRn = TRn – TRn-1
MRn = MR of nth unit
TRn = TR from n units
TRn-1 = TR from (n-1) units
n = number of units sold
We now know that MR is the change in TR when one more unit of output is sold. However, when change in units sold is greater than one unit, then MP can be calculated as,
MR = Change in TR/ Change in number of units
MR = ΔTR/ΔQ