Microeconomic Decision‑Makers: Firms' Costs, Revenue and Objectives
Microeconomic Decision‑Makers: Firms' Costs, Revenue and Objectives
Objective
Define Total Revenue (TR) and Average Revenue (AR) and understand their relationship.
Key Definitions
Total Revenue (TR): The total amount of money a firm receives from the sale of its output. It is calculated as the product of the price per unit (\$P\$) and the quantity sold (\$Q\$). \$TR = P \times Q\$
Average Revenue (AR): The revenue earned per unit of output sold. It is obtained by dividing total revenue by the quantity of output. \$AR = \frac{TR}{Q} = P\$
Relationship Between TR and AR
Because AR is the revenue per unit, it is equal to the market price (\$P\$) for a firm operating in a perfectly competitive market. The following table summarises the formulas and their economic interpretation.
Concept
Formula
Economic Meaning
Total Revenue (TR)
\$TR = P \times Q\$
The overall monetary inflow from selling \$Q\$ units at price \$P\$.
Average Revenue (AR)
\$AR = \frac{TR}{Q} = P\$
Revenue earned on average per unit; equals price in perfect competition.
Illustrative Example
Suppose a firm sells 200 units of a product at a market price of £5 per unit.
Calculate Total Revenue: \$TR = 5 \times 200 = £1{,}000\$
Calculate Average Revenue: \$AR = \frac{1{,}000}{200} = £5\$
Suggested diagram: A graph showing Total Revenue (TR) and Average Revenue (AR) curves with quantity on the horizontal axis and revenue on the vertical axis. In perfect competition, the AR curve is a horizontal line at price \$P\$.
Key Points to Remember
TR increases as either price or quantity sold increases.
AR is constant and equal to price in a perfectly competitive market; it can vary in other market structures.
Understanding TR and AR is essential for analysing profit, which is \$Profit = TR - TC\$ (where \$TC\$ is total cost).