Resources | Subject Notes | Economics
This section focuses on how firms make decisions regarding production, considering their costs, revenue, and various objectives. A key aspect is understanding Total Revenue (TR) and Average Revenue (AR).
Total Revenue represents the total amount of money a firm receives from selling its goods or services.
Formula:
$TR = P \times Q$
Where:
Example: If a firm sells 10 units at a price of $5 each, its total revenue is:
$TR = $5 \times 10 = $50$
Average Revenue is the total revenue divided by the quantity of units sold. It represents the average price a firm receives for each unit.
Formula:
$AR = \frac{TR}{Q}$
Where:
Example: If a firm sells 10 units and its total revenue is $50, its average revenue is:
$AR = \frac{$50}{10} = $5$
The relationship between Total Revenue and Average Revenue is crucial for understanding a firm's profitability. The following holds true:
This relationship is often visualized with a firm's average revenue (AR) and total revenue (TR) curves.
| Quantity (Q) | Price (P) | Total Revenue (TR = P x Q) | Average Revenue (AR = TR / Q) |
|---|---|---|---|
| 10 | $5 | $50 | $5 |
| 20 | $6 | $120 | $6 |
| 30 | $7 | $210 | $7 |
Figure: Suggested diagram: A graph showing the Total Revenue (TR) and Average Revenue (AR) curves. The TR curve typically slopes upwards, while the AR curve is typically constant. The intersection point represents the quantity where TR = AR.
Understanding TR and AR is essential for firms to make informed decisions about: