Helna is a postgraduate in commerce who is working as a manager. She loves sharing informative information with her readers.
The revenue of a firm is its sale receipts
What is Revenue?
Concepts of Revenue
You have a factory manufacturing toilet soap. You produce one thousand cakes or bars of soaps daily. By selling the same you receive five thousand rupees. In economics, this amount of five thousand rupees obtained is called revenue. The combined amount of money that a firm gets from the sale of its product is considered its revenue.
In the words of Dooley, “The revenue of a firm is its sale receipts.”
A firm’s revenue represents the amount it receives by selling goods or services in a given period.
Total revenue may be defined as the amount of money that the firm receives from the sale of its total production output. It is the number of products manufactured multiplied by the rate of the product.
For example, if five hundred cakes or bars of toilet soap manufactured and sold at the rate of Rs. 5 per bar of toilet soap. In that case the total revenue will be Rs. 2500. (Rs. 5 X 500)
To calculate total revenue either price per unit (Average Revenue) is multiplied by the number of units sold. Or the total sale value of the products (marginal revenue) added up. That is the total sale price of all pieces of products manufactured.
Thus TR = P X Q
(Here TR = Total Revenue; P = Price; Q = Quantity
Or TR = ∑MR
(Here TR = Total Revenue; MR = Marginal Revenue or Sale value of a single product; and ∑ = Summation)
Average Revenue is defined as revenue per unit of output. That means the sale value of a sole product.
For example, if five hundred cakes or bars of toilet soap manufactured and sold at the rate of Rs. 5 per bar of toilet soap. In that case the Average Revenue will be Rs. 5. This is the sale value of a single unit.
In the words of Mc Connell, “Average Revenue is the per-unit revenue received from the sale of one unit of a commodity.”
Average revenue is the ratio of the total revenue to the quantity sold of the product. It is calculated by dividing total revenue by the total number of units sold.
AR = TR ÷ Q = (P x Q) ÷ Q = P
(Here, AR = Average revenue; TR=Total Revenue; Q=quantity sold and; P= price)
In this manner, the Average Revenue is the same as the price of the commodity. If the total revenue obtained by selling 5 units is Rs. 25, the average revenue or price will be Rs. 5 per unit (Rs. 25÷5).
Marginal revenue is defined as the change in total revenue on account of the sale of one more unit of the commodity.
In the Words of Ferguson, “Marginal revenue is the change in total revenue that results from the sale of one more or one less unit of output.”
To calculate marginal revenue, either change in total revenue (ΔTR) is divided by the change in quantity (ΔQ) of the goods/product sold or out of combined revenue of ‘n’ units, total revenue of ‘n-1’ units is deducted.
MR = Change in total revenue ÷ change in quantity sold
MR = ΔTR ÷ ΔQ
MR = TRn – TR n-1
(Here, MR = Marginal Revenue; Δ = Change in: TR = Total Revenue; Q = Output; TRn = Total Revenue of ‘n’ units; TRn-1 = Total Revenue of ‘n-1’ units; n = number of units sold)
For example, when 4 units of a commodity are sold, total revenue is Rs. 20 and when 5 units are sold, total revenue increases to Rs.25. Therefore, the Marginal revenue of the 5th unit is Rs. 25 – Rs. 20 = Rs. 5. It may also be defined as the rate of change in total revenue.
Important Note: Revenue should not be misunderstood as profit. Revenue merely refers to the money receipts of the producer from the sale of his output. Profit, on the other hand, is the difference between the combined revenue and total cost.
This content is accurate and true to the best of the author’s knowledge and is not meant to substitute for formal and individualized advice from a qualified professional.
© 2020 Helna
Devika Primić from Dubrovnik, Croatia on November 04, 2020:
Informative and well-reserched on revenue.
Umesh Chandra Bhatt from Kharghar, Navi Mumbai, India on October 12, 2020:
Basics of revenue very well explained.