Economics · Ch 5 — Cost of Production and Concepts of Revenue
Concepts of Revenue: TR, AR and MR
Concepts of Revenue: TR, AR and MR
Cost tells a firm what production takes out of its pocket; revenue tells it what selling puts back in. Three revenue measures matter for output decisions.
Total Revenue (TR) is the firm's total sale proceeds: , price per unit multiplied by the number of units sold.
Average Revenue (AR) is revenue per unit sold: . Since , this simplifies to — average revenue is always exactly equal to price. This also means the firm's AR curve is nothing but its demand curve, viewed from the selling side.
Marginal Revenue (MR) is the addition to total revenue from selling one more unit: .
Under perfect competition, a firm is a 'price taker' — it is too small to influence the market price and can sell any quantity it wishes at the going price. Suppose the market price is a constant ₹15 per unit:
| Q | Price (₹) | TR = P × Q (₹) | AR = TR / Q (₹) | MR = ΔTR / ΔQ (₹) |
|---|---|---|---|---|
| 1 | 15 | 15 | 15 | 15 |
| 2 | 15 | 30 | 15 | 15 |
| 3 | 15 | 45 | 15 | 15 |
| 4 | 15 | 60 | 15 | 15 |
| 5 | 15 | 75 | 15 | 15 |