Types of revenue in economics

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TYPES OF REVENUE
Prepared by Sandrea Butcher
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Objectives

1. To explain the concept of revenue
2. To distinguish amongst total revenue, average
   revenue and marginal revenue
3. To analyse the relationship between total
   revenue, average revenue and marginal revenue

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What is revenue?

• Revenue is derived from the sale of the goods and
  services of a firm.

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Types of revenue
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Total revenue

• Total revenue (TR) is the amount of money
  received when a firm sells products.
• TR Price x Quantity P x Q

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The following diagram shows a demand curve with
price set at P1 and output at Q1.
P
P1
Demand
Q1
Q
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If price is set at P1, and output Q1 is demanded,
then total revenue is area 0P1EQ1.
P
Revenue
E
P1
Demand
0
Q1
Q
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Average Revenue

• Average revenue (AR) is the total revenue per
  unit of output which is sold.
• AR ???? ??

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Example

• If ten (10) units are sold for 85, then
• AR 85 10
• 8.50

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Marginal Revenue

• Marginal revenue (MR) is the extra revenue gained
  when one more unit of output is sold, per period
  of time.
• MR ??h???????? ???? ???? ??h???????? ???? ??
• MR ????? ???

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Example

• A firm sells ten (10) units at 85 and eleven
  (11) units at 100. Calculate the marginal
  revenue.
• The change in total revenue is (100 - 85) 15
• The change in output is (11 10) 1
• MR 15 1 15

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Application
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A firm sells the following units and earns the
revenue given.
Output TR ()
0 0
1 6
2 14
3 22
4 28
5 32
6 32
7 30
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Calculate the average revenue and marginal revenue
Output TR AR MR
0 0
1 6
2 14
3 22
4 28
5 32
6 32
7 30
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Solution
Output TR AR MR
0 0
1 6
2 14
3 22
4 28
5 32
6 32
7 30
-
-
6
6
8
7
8
7.33
7
6
6.40
4
0
5.33
-2
4.29
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Points to note

• There is no revenue when zero goods are sold.
• There is a dash in the table for average revenue
  at 0 units of output because of the division by
  zero.
• There is a dash for marginal revenue at 0 units
  of output because there is no change in total
  revenue.

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Graphs of revenue curves
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Total Revenue Curve
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Average Revenue Curve
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Marginal Revenue Curve
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Curves
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Relationship between TR, AR and MR
MR
AR
TR
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TR and MR

• The MR curve reflects the gradient of the TR
  curve.
• When the TR curve is increasing MR is positive.
• The TR curve reaches a maximum when MR is equal
  to zero.
• When TR starts to decrease MR is negative.

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MR and AR

• AR increases as long as MR is greater than AR (ie
  when MR gt AR, AR increases)
• AR reaches a maximum and is constant when it is
  equal to MR (ie when MR AR, AR is at its
  maximum).
• AR decreases as long as MR is less than AR (ie
  when MR lt AR, AR decreases)

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The End