Revenue concepts

The essentials

Revenue is the money a firm receives from selling its output. Total revenue (TR) = price × quantity sold. Average revenue (AR) = TR ÷ q, which is always equal to price. Marginal revenue (MR) = ΔTR ÷ ΔQ, the change in TR from selling one more unit.

Key points

• Price taker (perfect competition): price is constant, so AR = MR = price. The AR and MR curves are the same horizontal line, and TR is an upward straight line from the origin.
• Firm facing a downward-sloping demand curve (monopoly, monopolistic competition): to sell more, price must be cut, so MR < AR. The AR curve is the demand curve.
• For a straight-line AR = a − bq, MR = a − 2bq: MR has twice the slope of AR and cuts the quantity axis halfway.
• TR rises while MR is positive, is maximum when MR = 0, and falls when MR is negative.
• When AR falls, MR lies below AR; MR can be negative though AR (price) is positive.
• TR is the sum of marginal revenues.

Exam tips

• AR is the same thing as price, so the demand curve facing a firm is its AR curve.
• In tables, compute TR first, then find MR by subtraction.

Common mistakes

• Taking price of the extra unit as MR when the firm must cut the price on all units. MR = new TR − old TR.
• Thinking TR is maximum when AR is maximum. TR is maximum where MR = 0.