Revenues: Total, Average

&
Marginal
Unit 6 - Lesson 7

Learning outcomes:
Distinguish between Total Revenue,
Average Revenue & Marginal Revenue.
Illustrate, using diagrams, the relationship
between Total Revenue, Average Revenue
& Marginal Revenue.
Calculate Total Revenue, Average Revenue,
& Marginal Revenue from a set of data.

Revenue
Revenue is the money firms receive from
sales of their output.
Firms generally look to maximize profit, not
revenue.
To better understand profit, we must look at
Revenues.
Total Revenue = Price X Quantity

Marginal Revenue
The additional Revenue a firm earns from
the sale of one additional unit of output.
Marginal Revenue (MR)
MR = change in TR divided by change in Quantity

Average Revenue
Revenue per unit of output/product sold.
Average Revenue = AR
AR = Total Revenue (TR) divided by Quantity (Q)
Price is always equal to Average Revenue

Total Revenue
Total Revenue can vary based on two factors:
1. Firm has no control over price - price taker and price does not change as output
changes.
2. Firm has some control over price - price
maker - and the price changes with changes
in output.

Price Takers
Firms that operate in Perfectly Competitive
marketplace are Price Takers.
Price Takers - price at which a firm can sell it
output does not change based on the amount
of output.
The Market dictates the price, not the producer.

Revenues for Price Takers

Complete the following chart:
Quantity

Price

10

10

10

10

10

10

10

Total Revenue

Average
Revenue

Marginal
Revenue

Graph your results - Do you recognize any similarities when a firm is a price taker?

Graph: Price Taker

Total Revenue (TR) increases at a
constant rate as output increases.
Price=Marginal Revenue=Average Revenue

When a firm is a price taker

P = MR = AR
ALWAYS

Price Makers
Complete the chart
and graph each
curve.
When is Total
Revenue
maximized?

Quantity

Price

12

11

10

10

TR

AR

MR

Graph: Price Maker

Price = Average Revenue = Demand
P = AR = D

When Marginal Revenue is = 0

Total Revenue is at its maximum.

Tragakes