Revenue

Resources | Subject Notes | Economics

Revenue

Revenue is the total amount of money a firm receives from selling its goods or services. It's a crucial concept in economics as it directly impacts a firm's profitability. Understanding different types of revenue is essential for analyzing a firm's performance.

Types of Revenue

There are two main types of revenue a firm can generate:

  • Total Revenue (TR): This is the total income a firm receives from selling a certain quantity of output. It's calculated as the price per unit multiplied by the quantity sold.
  • Average Revenue (AR): This is the total revenue divided by the quantity sold. It represents the average price a firm receives for each unit of output.

Calculating Revenue

The relationship between Total Revenue (TR), Average Revenue (AR), and Quantity (Q) is fundamental.

$$TR = P \times Q$$

$$AR = \frac{TR}{Q} = \frac{P \times Q}{Q} = P$$

Where:

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

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 relatively inelastic (flatter), then TR and AR will tend to move in the same direction. An increase in quantity will lead to a proportionally smaller decrease in price, resulting in an increase in TR and AR.
  • If the demand curve is relatively elastic (steeper), then TR and AR will move in opposite directions. An increase in quantity will lead to a proportionally larger decrease in price, resulting in a decrease in TR and AR.

Example

Consider a firm selling widgets. If the price of each widget is £5 and they sell 10 widgets, the total revenue is:

TR = £5 x 10 = £50

The average revenue is:

AR = £5

Diagram

Suggested diagram: A graph showing Total Revenue (TR) and Average Revenue (AR) curves. The TR curve is typically steeper than the AR curve, especially when demand is inelastic. The point where the TR and AR curves intersect represents the profit-maximizing quantity.

Key Considerations

Understanding revenue is a critical first step in analyzing a firm's profitability. Changes in price and quantity sold will directly impact revenue. Firms constantly analyze market conditions and adjust their pricing and output levels to maximize their revenue.

Term Definition Formula
Total Revenue (TR) Total income from sales $TR = P \times Q$
Average Revenue (AR) Total Revenue divided by quantity sold $AR = \frac{TR}{Q} = P$