IGCSE Economics 0455 – Firms' Costs, Revenue and Objectives
Microeconomic Decision‑Makers: Firms’ Costs, Revenue and Objectives
Learning Objective
Calculate Total Revenue (TR) and Average Revenue (AR) for a firm operating in a perfectly competitive market.
Key Definitions
Total Revenue (TR): The total amount of money a firm receives from the sale of its output.
\$TR = P \times Q\$
where \$P\$ = price per unit, \$Q\$ = quantity sold.
Average Revenue (AR): Revenue earned per unit of output sold. In perfect competition AR equals the market price.
\$AR = \frac{TR}{Q} = P\$
Step‑by‑Step Calculation
Identify the market price (\$P\$). In a perfectly competitive market the price is constant for all units sold.
Determine the quantity of output the firm intends to sell (\$Q\$).
Calculate Total Revenue using \$TR = P \times Q\$.
Calculate Average Revenue using \$AR = \frac{TR}{Q}\$ (or recognise that \$AR = P\$).
Worked Example
A firm operates in a market where the price of each widget is $£5. The firm sells the following quantities of widgets per week:
Quantity (\$Q\$)
Price (\$P\$)
Total Revenue (\$TR\$)
Average Revenue (\$AR\$)
0
£5
£0
–
10
£5
£50
£5
20
£5
£100
£5
30
£5
£150
£5
40
£5
£200
£5
Notice that because the price is constant, \$AR\$ remains equal to \$P\$ for every level of output.
Important Points for Examination
In perfect competition, \$AR\$ is always equal to the market price.
When asked to calculate \$TR\$, always multiply the given price by the quantity sold.
If the price is not given directly, it may be derived from a demand schedule or a price‑output table.
Remember that \$TR\$ and \$AR\$ are revenue concepts only; they do not incorporate costs.
Suggested diagram: Plot of Total Revenue (TR) and Average Revenue (AR) against Quantity (Q) showing a straight‑line AR curve at the market price and a linear upward‑sloping TR curve.