Microeconomic Decision-makers - Firms' Costs, Revenue and Objectives

Definitions of Total Revenue (TR) and Average Revenue (AR)

In microeconomics, firms make decisions based on their costs and revenues. Understanding total revenue (TR) and average revenue (AR) is fundamental to analyzing a firm's profitability and output decisions. These concepts are crucial for determining the optimal level of production.

Total Revenue (TR)

Total revenue represents the total amount of money a firm receives from selling its goods or services in a given period.

Formula:

$TR = P \times Q$

Where:

• $TR$ = Total Revenue
• $P$ = Price per unit
• $Q$ = Quantity of units sold

Example: If a firm sells 100 units at a price of $2 each, its total revenue is:

$TR = $2 \times 100 = $200$

Average Revenue (AR)

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:

• $AR$ = Average Revenue
• $TR$ = Total Revenue
• $Q$ = Quantity of units sold

Example: If a firm sells 100 units and its total revenue is $200, its average revenue is:

$AR = \frac{$200}{100} = $2$

Relationship between TR and AR

The relationship between total revenue and average revenue depends on the firm's demand curve.

• If the demand curve is downward sloping: $AR < P < TR$. This is the most common scenario.
• If the demand curve is perfectly elastic (horizontal): $AR = P = TR$.

Table Summarizing TR and AR

Concept	Formula	Units
Total Revenue (TR)	$TR = P \times Q$	$ \$$ (Currency)
Average Revenue (AR)	$AR = \frac{TR}{Q}$	$ \$$ (Currency per unit)