We know that profit-maximisation is the main goal of a firm. This profit is the difference between revenue and cost. Therefore, it is necessary to analyse the revenues and costs which are linked with production and with the policy-making decision of producer relating to profit maximisation. Let us start our discussion on revenue analysis.
Revenue is the money receipts from the sale of the products. Price paid by the consumer for the product forms the revenue or income of the seller. In other words, revenue or income refers to the amount of money which a firm secures by selling its product. Three terms, commonly used with regard to revenue are: total revenue, average revenue and marginal revenue.
1. Total Revenue (TR):
The whole income received by the seller from selling a given amount of product is called total revenue. If a seller sells 50 units of a product and obtains Rs. 1000 from the sale, then his total revenue is Rs. 1000. It can be calculated by multiplying the price per unit of output with the total quantity of output sold in the market.
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In symbols, Total Revenue = Price x Quantity
TR = P x Q
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2. Average Revenue (AR):
Average revenue is the revenue earned per unit of output. Average revenue is obtained by dividing the total revenue by the number of units sold.
3. Marginal Revenue (MR):
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Marginal revenue refers to the addition made to the total revenue from the sale of an additional unit of output.
Algebraically, MR = TRn – TRn , where n stands for any number.
For example, by selling 50 units, the firm gets Rs. 1000/- as total revenue and by selling 51 units of the same product, the total revenue rises to Rs. 1025/-. Then marginal revenue is Rs. 1025 -Rs. 1000 = Rs. 25/-.