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Introduction
Cost and revenue are just like two different faces of the same coin. The costs and
revenues of a firm determine its nature and the levels of profit. Cost refers to the
expenses incurred by a producer for the production of a commodity. Revenue
denotes the amount of income, which a firm receives by the sale of its output. The
revenue concepts commonly used in economic are total revenue, average revenue
and marginal revenue.
Total Revenue
Total revenue refers to the total sale proceeds of a firm by selling its total output at a
given price. Mathematically TR = PQ, where TR = Total Revenue, P = Price, Q =
Quantity sold. Suppose a firm sells 100 units of a product at the price of $5 each, the
total revenue will be 100 × $5 = $500.
Average Revenue
Average revenue is the revenue per unit of the commodity sold. It is obtained by
dividing the total revenue by the number of units sold. Mathematically AR = TR/Q;
where AR = Average revenue, TR = Total revenue and Q = Quantity sold. In our
example, average revenue is = 500/100 = $5. Thus, average revenue means price.
Marginal Revenue
Marginal revenue is the addition to total revenue by selling one more unit of the
commodity.
Algebraically it is the total revenue earned by selling ‘n’ units of the commodity
instead of n-1. Thus,
MRn = TRn – TRn-1; where MRn = Marginal revenue of the nth unit
TRn = Total revenue of n units
TRn-1 = Total revenue of n-1 units
N = Any given number of units sold.
Suppose 5 units of a product are sold at a revenue of $50 and 6 units are sold at a
total revenue of $60. The marginal revenue will be $60 - $50 = $10. It implies that the
6th unit earns an additional income of $10.
Ep = PB/PA = PM/AE
And; ∆AET and ∆PTL are congruent triangles, therefore PL=AE.
Putting PL in place of AE in the above equation, we shall get