The amount of money that the producer receives in exchange for the goods (sale proceeds) is called producer’s receipts or revenue. We can conceive of three concepts of revenue: total revenue, average revenue and marginal revenue.
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1. Total Revenue (TR):
Total amount of money or income received by the firm from the sale of a certain quantity of output is called total revenue. It is obtained by multiplying the price of a commodity by the number of units sold, i.e., TR= P.Q, where ‘P’ is the price of the commodity and ‘Q’ is the number of units sold.
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If Mr. Sarve Daman Dixit sells 250 shares at the price of Rs. 50 each, his total revenue from the sale will be Rs. 50 x 250 = Rs. 12,500. Sometimes, it is called as the gross revenue. Total revenue is a function of output.
Mathematically, TR = f (Q)
It is clear from the above formula that average revenue at each level of output is equal to the price per unit. This can be verified by the previous example. Here, average revenue of Mr. Sarve Daman is Rs. 12,500 (total revenue) divided by 250 (number of shares), i.e., Rs. 50,
2. Average Revenue (AR):
Average revenue (average income or receipts) is the revenue that a firm gets, per unit of the good sold. It is computed by dividing the total revenue by the number of units of a good sold.
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Thus,
AR = TR/Q = P x Q/Q = P
It is clear from the above formula that average revenue at each level of output is equal to the price per unit. This can be verified by the previous example. Here, average revenue of Mr. Sarve Daman is Rs. 12,500 (total revenue) divided by 250 (number of shares), i.e., Rs. 50, which is also equal to the price of the share.
However, when the producer sells different units of the commodity at different prices, the above result may not hold. In real life, such discrimination seldom happens. Hence, in Economics, average revenue and price are used synonymously.
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Further, the buyer’s demand curve represents graphically the quantities demanded by the buyers at various prices. In other words, it shows the average revenue at which various quantities of the good are sold by the seller.
Therefore, it is customary to refer the average revenue curve as the demand curve of the firm. Graphically, the average revenue corresponding to any point on TR curve can be derived by considering the slope of the ray from the origin to that point on the TR curve, i.e., perpendicular (TR) /base (output).
3. Marginal Revenue (MR):
Marginal revenue (on demand side) is similar to marginal cost on supply side. It is the addition to the total revenue by selling one additional unit of the good, i.e., the revenue which would be earned by selling an additional unit of the good.
Algebraically, it is the addition to total revenue by selling ‘n’ units of a product, instead of (n-1) units. We may write
MRn =TRn – TRn-1
Suppose, a seller sells 20 units of a product at Rs. 25 each, then his total revenue is Rs. 500. If he increases the sales by one unit and consequently the price falls to Rs. 24, then his new total revenue is 21 x Rs. 24 = Rs. 504.
It means that twenty first unit has added Rs. 4 to the total revenue. It is the marginal revenue by selling the twenty first units of the good.
Marginal revenue can also be expressed as
MR = ∆TR/∆Q
Where,
∆ TR is change in total revenue, and
∆ Q is change in quantity
Thus, “marginal revenue is the change in total revenue associated with a change in quantity sold”.