THE CONCEPT OF REVENUE

Revenue is an income earned by any firm that sells goods and services at any market price.
Concepts of revenue are:
o Total Revenue
Total income earned by any firm that sells certain quantity
of goods and services.
- Total Revenue (TR) = Quantity X Price
o

Average Revenue

- It is an income for each unit of output sold.

- Average Revenue (AR) = Total Revenue
Quantity

Marginal Revenue - It is an additional total revenue earned by a firm for each

unit of goods sold
- Marginal Revenue = Change in Total Revenue
Change in Quantity

additional

Case 1: Good sold at the same price (constant price)

Quantity

Price (RM)

0
1
2
3
4
5

10
10
10
10
10
10

Total Revenue
(TR)

Average Revenue
(AR)

Marginal Revenue
(MR)

Graphically,
P, AR,MR

Total Revenue

P = AR= MR

Quantity

Total revenue will be a upward sloping curve

Average revenue, marginal revenue curves will be the same as price and is horizontal showing
that regardless of output, average revenue, marginal revenue and price is constant

Case 2: Goods sold at different prices

Quantity

Price (RM)

0
1
2
3
4
5
6
7
8

0
18
16
14
12
10
8
6
4

Total Revenue
(TR)

Average Revenue
(AR)

Marginal Revenue
(MR)

Graphically,
Price, Revenue

AR = D
MR
TR
Quantity

Total revenue is upwards sloping until a maximum then it starts to decline

Average revenue and marginal revenue is downward sloping where marginal revenue is more
steep as it decreases faster than average revenue

Determination of equilibrium output

Two ways to determine equilibrium output:

A)
B)

A)

Total cost/total revenue approach

Marginal cost/marginal revenue approach
Total cost/total revenue approach
A firm should produce if it can achieve profit (profit maximization) or attain a loss which
is smaller than its total fixed cost (loss minimization)
Profits are maximized when the excess of total revenue over total cost is the largest
Losses are minimized when the excess of total cost over total revenue is the smallest but
greater than total fixed cost
If losses exceed total fixed cost, then the firm should close down
Profit maximization can also be calculated from the table below:
Quantity
0
10
20

Total Revenue
0
200
400

Total Cost
300
400
450

Profit

30
40
50
60
70
80
90

600
800
1000
1200
1400
1600
1800

480
550
650
820
1000
1400
1850

The table shows at low levels of output, the firm is incurring losses. As production
increases, profits increases and eventually reaches a maximum level (output = 70). After
the maximum level, the profit will start to decline.

B) Marginal cost/ marginal revenue approach

Equilibrium point occurs when marginal cost is equals to marginal revenue. At this point, the
firm maximizes its profits or minimizes its losses
Graphically:
Price, Revenue
Quantity

Q1

Q2

Q1 is profit minimization while Q2 is profit maximization

Q2 is the equilibrium point as firms will not stop at Q1 as profits can still be increased

Examples:
1. The total variable cost (TVC) and total cost (TC) of a firm at various levels of output is given in the
table below. Each output is sold at RM4.
Quantity (unit)
0
10
20
30
40
50
60
65
70
75
80
85
90

TVC (RM)
0
35
65
85
95
105
120
131
145
162
185
225
295

TC (RM)
65
100
130
150
160
170
185
196
210
227
250
290
360

a. The firms total fixed cost is _________________

b. Determine the output at which the firm will maximize total profits.
c. At what two levels of outputs will the firm break even?
2. The table below shows the cost and revenue for a perfectly competitive firm. The average revenue
is fixed at RM12 per unit.
Quantity
(unit)
0

Total Variable
Cost (TVC)

Total Cost
(TC)
12

22

28

33

40

52

72

a)
b)
c)
d)
e)

Marginal Cost
(MC)

Total Revenue
(TR)

Marginal
Revenue (MR)

Complete the table above.

Determine the profit maximizing output.
Calculate the amount of profit the firm is earning at equilibrium. State the amount of profit.
How much is the total fixed cost for the above firm?
At equilibrium, calculate:
i)
Average cost (AC)
ii) Average variable cost (AVC)
f) Sketch a diagram to show the equilibrium position of the firm.