Total Revenue, Average Revenue, and Marginal Revenue2 min read


Learning Objectives

  • Concept of total revenue in Perfect Competition and monopoly
  • Concept of average revenue in Perfect Competition and Monopoly
  • Concept of Marginal Revenue in Perfect Competition and Monopoly
  • Derivation of TR, AR, and MR curve using tabular data

Total Revenue

Total revenue can be defined as the total amount of money earned by the firm by selling the output produced. The total revenue of any firm can be determined by multiplying the price per unit and total quality sold by the firm.

In case of perfect competition,

  • Total Revenue (TR) = Price (P’) x Total Quantity (Q) [where P’ is a constant price]

In case of monopoly,

  • Total Revenue (TR) = Σ(P x Q) [Where P is a variable price]

Average Revenue

Average revenue can be defined as the amount of money earned by the firm by selling per unit output produced. The average revenue is also the demand curve of the firm because demand curve shows the relationship between average price and the quantity demanded. Mathematically, Average revenue equals to Total revenue divided by quantity sold.

In case of perfect competition, 

  • Average revenue = TR/Q = (P x Q)/Q = P

In case of monopoly,  

  • Average Revenue = TR/Q = Σ(P x Q)/ΣQ

Marginal Revenue

Marginal Revenue can be defined as the change in total revenue due to one unit change in quantity sold. 

In case of perfect competition,

  • Marginal Revenue = ΔTR/ΔQ = P x ΔQ/ΔQ = P [Price is constant in Perfect Competition]

In case of monopoly

  • Marginal Revenue = ΔTR/ΔQ

Tabular Analysis

  • Perfect Competition
Price (P)Quantity (Q)TR (P x Q)AR (TR/Q)MR (ΔTR/ΔQ)
10010010000100100
10020020000100100
10030030000100100
10040040000100100
10050050000100100
10060060000100100
10070070000100100
10080080000100100
10090090000100100
1001000100000100100

The average revenue equals to price and is parallel to quantity axis. The average revenue is horizontal because the firm is price taker not the price maker.

  • Monopoly
Price (P)Quantity (Q)TR (P x Q)AR (TR/Q)MR (ΔTR/ΔQ)
100010010000010001000
900300270000900850
800500400000800650
700700490000700450
600900540000600250
500110055000050050
4001300520000400-150
3001500450000300-350

The average revenue in monopoly slopes download because the monopolist has control over either price or quantity; he or she has to choose between price or quantity. There is trade-off between price and quantity, so if he or she wishes to increase the price, then he or she must accept the fall in quantity demanded and vice-versa.


Leave a Reply

avatar
  Subscribe  
Notify of
Close Menu