[Commerce Class Notes] on Concepts of Total Revenue, Average Revenue and Marginal Revenue Pdf for Exam

A company’s revenue is what it earns from selling commodities, and services to consumers, which are its normal business pursuits. It is also called turnover or sales. Royalties, fees, or interests may also be a source of revenue.

By setting a cost price less than or equivalent to the market cost price, an enterprise believes it can sell as many quantities of its product as it needs. The rationale for lowering the cost price of a product is lost in such a scenario. As a result, the enterprise should set a cost price that matches the market price of the commodity to the greatest extent possible.

 

The Types of Revenues

• Total revenue: The total revenue is the total amount a vendor can collect from the sale of commodities or services to the customer. The price of the commodities can be expressed as P × Q, which means the cost price of the commodities multiplied by the amount sold. Therefore, total revenue (TR) is defined as the market cost price of the commodity (p) multiplied by the enterprise’s output (q).

Thus,

            TR = p × q

Where

TR-Total Revenue,

P-Price,

Q-Quantity.

• Average revenue: The average revenue represents the revenue initiated per unit of output sold. The average revenue contributes greatly to the profit of any enterprise. In calculating profit per unit, the average (total) cost is subtracted from the average revenue. It is usually more profitable for an enterprise to manufacture the greatest amount of output.

AR = TR/q = p × q/q = p

Where

AR-Average Revenue,

TR-Total Revenue,

P-Price

Q-Quantity.

• Marginal revenue: It is defined as the revenue earned from the sale of a new product or unit. In other words, it is the revenue that a company generates when it sells an extra unit. Management uses it to analyze customer demands, plan the production schedules, and set the prices of products.

In accordance with the law of diminishing returns, the margin of revenue remains constant to a certain output level, and slows down as output increases.

MR = Change in total revenue/Change in quantity

Where

MR-Marginal Revenue,

TR-Total Revenue,

Q-Quantity.