Concepts of Total Revenue Average Revenue and Marginal Revenue

Total Revenue
A firm sells 100 units of a particular commodity for Rs. 10 each.

If you were to calculate the amount realized by the firm

= Rs. 1,000 (100 x 10). This is the total revenue for the firm.

Hence, the total revenue refers to the amount of money realized by a firm on the sale of a commodity.

Total revenue is expressed as follows:

TR = P x Q

Where TR – Total Revenue, P – Price, and Q – Quantity of the commodity sold.

Average Revenue
Average revenue is simply the revenue earned per unit of the output.

In simpler words, it is the price of one unit of the output.

Average revenue is expressed as follows:

AR=TR/Q
where AR – Average Revenue, TR – Total Revenue,
and Q – Quantity of the commodity sold.
For example, a firm sells 100 units of a commodity and realizes a total revenue of Rs. 1,000. Therefore, its average
revenue is

AR=1000/100=Rs.10
Hence, the firm sells the commodity at a price of Rs. 10 per unit.

Marginal Revenue
Marginal revenue (MR) is the change in total revenue resulting from the sale of an additional unit of a commodity.

For example, consider a firm selling 100 units of a commodity and realizing a total revenue of Rs. 1,000. Further, it
realizes a total revenue of Rs. 1,200 after selling 101 units of the same commodity. Therefore, the marginal revenue is
Rs. 200.

Marginal revenue is also defined as the rate of change of total revenue resulting from the sale of an additional unit of a
commodity.

Therefore,

MR=ΔTR/ΔQ
Where MR – Marginal revenue, TR – Total revenue,
Q – Quantity of the commodity sold, and Δ – the rate of change.
Further, for one unit change in output, we have

MRn = TRn – TRn-1

Where,

TRn – the total revenue when the sales are at the rate of ‘n’ units per period.

TRn-1 – the total revenue when the sales are at the rate of (n-1) units per period.

Relation between Total Revenue, Average Revenue and Marginal Revenue!

1. Both AR and MR are Calculated from TR:

The average cost and marginal costs are calculated from total cost. In the same fashion, average
revenue and marginal revenue can also be calculated from total revenue.

2. When AR and MR are Parallel to X-axis:

If average revenue and marginal revenue are parallel to horizontal axis then it means both AR and MR
are equal to each other i.e. AR = MR. It has been shown with the help of table 2 and diagram 2.

In figure 2, on X-axis, we have measured output and on Y-axis revenue. Average and
marginal revenue are horizontal lines which are parallel to X-axis. It is a case under
perfect competition.

When both AR and MR are Straight Lines:

Under imperfect competition, when AR falls, MR also falls and it is always below AR line because there
are large numbers of buyers and sellers, products are not homogeneous and the firms can enter or exit
the market. It can be shown with the help of a table 3.
It is clear from the table that as price falls (AR falls) from Rs. 10 to Rs. 6, the total revenue (TR) increases
from Rs. 10 to Rs. 30 at a diminishing rate. MR also falls from Rs. 10 to Rs. 2, MR is the rate at which the
TR changes. It can also be drawn with the help of a Fig. 3.

In Fig. 3, AR and MR curves have been shown. It shows when AR curve falls MR curve also falls, and the
MR curve will be below the AR curve. But, this situation exists only under monopoly and imperfec In Fig.
3, AR and MR curves have been shown. It shows when AR curve falls MR curve also falls, and the MR
curve will be below the AR curve. But, this situation exists only under monopoly and imperfect
competition.
Relationship between marginal revenue and elasticity
The relationship between marginal revenue and the elasticity of demand by the firm's customers can be

derived as follows:[9]
where R is total revenue, P(Q) is the inverse of the demand function, and e < 0 is the price elasticity of
demand. If demand is inelastic (e > –1) then MR will be negative, because to sell a marginal (infinitesimal) unit
the firm would have to lower the selling price so much that it would lose more revenue on the pre-existing units
than it would gain on the incremental unit.

If demand is elastic (e < –1) MR will be positive, because the additional unit would not drive down the price by
so much. If the firm is a perfect competitor, so that it is so small in the market that its quantity produced and
sold has no effect on the price, then the price elasticity of demand is negative infinity, and marginal revenue
simply equals the (market-determined) price.