Revenue is defined as the income received by a firm or organization from the sales of its product.

In other words, revenue is defined as the receipt that a firm obtains from selling its goods.

The following revenue calculation is used by economists to analyze the revenue of economic entities.

1. Total revenue (TR):

As the name implies, total revenue is the total receipt that a firm obtains from selling its goods.

More appropriately, total revenue is the sum of all payments received by a firm or organization from the sales of its goods.

It is computed as price times quantity, like this:

TR=P×Q.

For instance, if a firm was able to sell 500 apples at €30 each, its total revenue will be 500 x €30

= €1500.

As another example, if a firm sells 100 books for €5 per book, then its total revenue would be 5×100 = €500

2. Average revenue (AR):

As the name suggests, average revenue is the per-unit revenue. It is derived by dividing the total revenue of a firm by the quantity sold.

Mathematically, Average revenue is expressed as:

AR= ^TR/_Q.

It is important to note that average revenue always equals price.

Let me show how valid this is, mathematically;

You know,

AR = ^TR/_Q

But TR = P×Q, Hence

AR = ^P×Q/_Q

Hence AR = P

Because the average revenue always equals price, the average revenue curve of any firm is the same as its demand curve.

Remember that the demand curve relates to price and quantity while average revenue relates to average revenue and quantity.

Example

If a firm receives a total revenue of €400 from selling 40 apples. Its average revenue is:

AR = 400/40

AR = €10

3. Marginal Revenue (MR):

This refers to the addition to total revenue as a result of selling one unit of output.

Simply put, marginal revenue is the change in total revenue as a result of selling an additional unit of sales.

Mathematically, it is represented as:

MR = ^∆TR / _∆Q