Revenue Concepts

Revenue concepts are the mirror image of cost concepts, describing what a firm earns rather than what it spends, and are essential to determine a firm's profit-maximising output (marginal revenue = marginal cost, covered under Theory of Value).

The three revenue measures

• Total Revenue (TR) — total receipts from the sale of output: $TR = P \times Q$, where $P$ is price per unit and $Q$ is quantity sold.
• Average Revenue (AR) — revenue per unit sold: $AR = \dfrac{TR}{Q} = P$. AR is therefore always identical to the price the firm charges — this is exactly why the demand curve facing a firm is its AR curve.
• Marginal Revenue (MR) — the addition to total revenue from selling one more unit: $MR_n = TR_n - TR_{n-1}$.

AR and MR under different market forms

• Perfect competition: the firm is a price taker facing a horizontal demand curve at the market price. Since every unit is sold at the same price, $AR = MR = P$, and both are shown as a single horizontal straight line.
• Imperfect competition (monopoly, monopolistic competition): the firm faces a downward-sloping demand curve — to sell more, it must lower the price on all units sold, not just the extra one. As a result, MR falls faster than AR (price), and beyond the first unit, $MR < AR$ always. MR can even turn negative while AR (price) stays positive, once cutting the price to sell one more unit reduces total revenue overall. …