Revenue Concepts

Statement

The revenue concepts used to analyse a firm are:

• Total Revenue (TR) — the firm’s total earnings over a period of time: $TR = P \times Q$.
• Average Revenue (AR) — the revenue earned per unit sold: $AR = TR / Q$. Average revenue equals the price of the firm’s product at each output, so the AR curve is the firm’s demand curve.
• Marginal Revenue (MR) — the additional revenue obtained from selling an additional unit of output.

Notes

The three magnitudes are related in the same way as their cost counterparts in the cost concepts note: the total is the running sum, the average is the total per unit, and the marginal is the increment from the last unit. Comparing marginal revenue with marginal cost gives the firm’s profit-maximising condition. Because AR is the firm’s demand curve, the responsiveness of quantity demanded to price — price elasticity of demand — governs how a price change feeds through to total revenue.