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Home > Fundamentals of Economics and Management - CMA > Forms of Market > Concepts of Total Revenue, Average Revenue and Marginal Revenue
Forms of Market

Concepts of Total Revenue, Average Revenue and Marginal Revenue

Revenue is the income earned by a firm by the sale of goods and services. We may also say that the sale value of the goods. Revenue is different from profit. Profit is equal to revenue less cost. Here, we shall discuss the total revenue, average revenue and marginal revenue.

Concepts of Total Revenue, Average Revenue and Marginal Revenue

  • Total revenue
  • Average revenue
  • Marginal revenue

1. Total revenue

It refers to the total income of a firm or producer or seller from the sale of total goods and services. Total revenue is also equal to the sum of all the marginal revenues. Thus,

TR = P x Q Or TR = ∑MR

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2. Average revenue

Average revenue is the revenue per unit of output sold in the market. In simple words, it is the price per unit of the commodity. We calculate the Average revenue by dividing the Total revenue with the number of units of output to be sold in the market. Thus,

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

3. Marginal revenue

Marginal revenue refers to the additional revenue that a firm or producer obtains by selling every additional unit of the commodity in the market. In other words, the change in total revenue is marginal revenue. Thus,

$$MR = \frac{∆TR}{∆Q}$$Or MR = TRn – TRn-1

average revenue and marginal revenue

Source: freepik.com

Revenue Curves under Different Markets

There are different types of revenue curves in different markets. Thus, the revenue curve in the perfect competition market is different from that in the imperfect competition market. Let us study each of these.

Learn more about Application of Marginal Cost and Marginal Revenue

1. Revenue curve under Perfect competition market

In the perfect market competition, there are a large number of small buyers and sellers. Thus, the firm is the price taker. Also, in this situation, all the firms sell homogeneous goods.

Thus, the price remains constant but the revenue changes. Here, Average revenue curve is a straight line parallel to X-axis. Also, in this situation AR = MR.

Let us Understand the Basic Concepts of Revenue here in detail

2. Revenue curve under Imperfect competition market

In the imperfect competition market, the price is not constant. It may increase or decrease due to market forces.

In order to increase sales, the seller will have to reduce the price of the commodity. But, when the price decreases, Average Revenue and Marginal Revenue also decrease.

In the imperfect competition market, both Average revenue curve and Marginal revenue curve slope downwards from left to right.

Also, the Marginal revenue curve is always below the Average Revenue curve. At some point, marginal revenue may also be zero and then negative.

However, Average revenue will always be positive.

Note: In all the market situations, the price is always equal to the Average revenue. Thus, AR = P.

Questions on Total Revenue, Marginal Revenue, and Average Revenue

Q. Explain the law of returns to scale?

Ans.

The returns to scale are of two types:

  1. Increasing returns to scale: It refers to a situation when the proportionate increase in the output is more than the proportionate increase in the inputs. It means that if we increase the inputs by 50% then the output will increase by more than 50%.
  2. Diminishing returns to scale: It refers to a situation when the proportionate increase in the output is less than the proportionate increase in the inputs. It means that if we increase the inputs by 50% then the output will increase by less than 50%.
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