Average Revenue and Marginal Revenue Calculation

Revenue can be defined as receipts or returns from the sale of products of an organization.

In other words, revenue is the income that an organization receives from normal business activities.

According to Dooley,

“The Revenue of a firm is its sales receipts or money receipt from the sale of a product”.

Total Revenue (TR) equals quantity of output multiplied by price per unit.

TR = Price (P) * Total output (Q)

For instance, if an organization sells 1000 units of a product at price of Rs. 10 per unit, the total revenue of the organization would be Rs. 10000.

Total revenue is a function of output, which is mathematically expressed as:

TR = f (Q)

From the aforementioned equation, it can be seen that the value of dependent variable (total revenue) is determined by the independent variable (output). In economic analysis, different types of revenue are taken into account.

Average Revenue:

Average Revenue (AR) can be defined as revenue per unit of output. In the words of McConnell, “Average revenue is the per unit revenue received from the sale of a commodity.”

AR is calculated as:

AR = TR/Q

Therefore, from the aforementioned equation, it can be said that AR is the rate at which output is sold, where rate refers to the price of the product.

We know that TR equals P*Q, thus,

AR = (P*Q)/Q

AR = P

Hence, it can be said that AR is nothing, but price of the product.

Marginal Revenue:

Marginal revenue (MR) can be defined as additional revenue gained from the additional unit of output. In the words of Ferugson, “Marginal revenue is the change in total revenue which results from the sale of one more or one less unit of output.”

It can be calculated as follows:

MR = ∆TR/ ∆Output

Or

MR = TRn – TRn-1

Let us understand the concept of MR with the help of an example. For instance, if 10 units of a good are sold for Rs. 100 and 11 units for Rs. 108. Calculate MR.

It is calculated as:

Total units sold = n = 11 units

Total units less last unit sold = n – 1 = 10 units

MR = TRn – TRn-1

=TR₁₁ – TR₁₀

= 108 – 100

= Rs. 8