Concepts of Revenue: TR, AR, MR

What is Revenue?

Ans- The Revenue schedule shows the potential amounts of receipts or revenue which the farm obtain if it sells various possible quantities at the price at which possible quantity can be sold.

Revenue Concepts

There are three main concepts of revenue.

Total Revenue (TR):- The TR may be defined as the total receipts of the farm from sale. It can be obtained by multiplying the price per unit of a commodity (Let P) with total number of unit of commodity sold (Let Q) to the customers.

                                       So,  TR = P × Q

Average Revenue (AR):- It is the revenue per unit of the commodity sold. It is calculated by dividing total revenue (TR) by number of units sold (Q).

                                       So,  AR = TR ÷ Q

Marginal Revenue (MR):- MR at any level of output is the revenue added to the total revenue by selling an additional unit of the product.

Since marginal revenue is change in total revenue (Change in TR) as a result of change in sale by one unit (Change in Q).

                                       So,  MR = Change in TR ÷ Change in Q

Relation between AR and MR :

a)      When AR rises, then MR is more than AR (MR > AR).

b)      When AR is constant, then AR = MR.

c)       When AR falls, then MR is less than AR (MR < AR).

 

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