Revenue Concepts: Total, Average and Marginal Revenue

Just as cost concepts describe what a firm gives up to produce, revenue concepts describe what it receives from selling its output.

Total Revenue (TR) is the total sale proceeds a firm earns from selling a given quantity of output at a given price:

Average Revenue (AR) is the revenue earned per unit sold:

AR therefore always equals the PRICE of the good — dividing total revenue by the number of units sold simply gives back the price at which those units were sold. This is exactly why a firm's AR curve is identical to the demand curve it faces: both show, at every quantity, the price at which that quantity can be sold.

Marginal Revenue (MR) is the addition to total revenue from selling one more unit:

The following schedule illustrates TR, AR and MR for a firm selling at a constant price of Rs. 20 per unit, whatever the quantity sold (as under perfect competition, covered in the next section):