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Definition and Meaning of Revenue:

By ‘revenue’ of a firm is meant the total sale proceeds or the total receipts of a firm from the sale of the output.

The various kinds or types of revenue will be discussed here under three heads:

  • Total Revenue (TR)
  • Marginal Revenue (MR)
  • Average Revenue (AR)

(1) Total Revenue (TR):

Definition:

By ‘total revenue’ of a firm is meant the total amount of sale proceeds or the total receipts of the firm.

Formula:

Total Revenue = Price x Quantity Sold

TR = P x Q

Here:

P means price.

Q means quantity.

TR means total revenue.

Example:

If a firm producing cloth and sells one hundred meters of cloth in the market at $4 per meter, the sale proceeds or the receipts of the firm will be $400. This total sale proceed which a firm has received by selling 100 meters of cloth is called its total revenue (TR). The total revenue varies with the sales of a firm.

TR = 4 x 100

TR = $400

(2) Marginal Revenue (MR):

Definition:

Marginal revenue (MR) is the addition made to the total revenue by a one unit increase in the volume of sales by the firm in the market. It can also be called as the net revenue earned by selling on additional unit of output.

Formula:

Example:

For example, if a firm sells 100 meters of cloth at $4 per meters, the total revenue of the firm is $400. If it increases the volume of sale from 100 meters to 101 meters, i.e., by one meter, the total revenue of the firm goes up to $404. The addition of $4 which has taken place in the total revenue by a one unit increase in the rate of sales per period of time is known as marginal revenue (MR).

(3) Average Revenue (AR):

Definition:

Average revenue (AR) is the revenue earned per unit of output. Average revenue is obtained by dividing the total revenue by the number of units sold in the market.

Formula:

Example:

For example, a firm sells 200 meters of cloth for $600, then the average revenue will be 600/200 = $3 only. Average revenue represents the average sale price per unit of the commodity. Average revenue curve can also be called demand curve.