Revenue and Profits

Revenue and profit:

Revenue does not only depend on the marketing conditions under which the business operates, but also, three revenue concepts which will vary with output. The first concept is total revenue (TR), this means the firm's total earnings per period of time from the sale of a particular amount of output (Q). The equation is as follows:

TR = P * Q

The second concept is average revenue (AR), this means the amount the firm earns per unit sold.1 The equation is as follows:

AR = TR/Q

The third concept is marginal revenue (MR), this means the extra total revenue gained by selling one more unit. 1 The equation is as follows:

MR = Ð"TR/Ð"Q

Calculating revenue curves also depends on whether or not price is affecting the firms output. For example, a business with a relatively small market share can only produce as much as it is capable at the set price. These businesses are therefore known as price takers. Price takers AR is indicated by the equilibrium price and also lies on the same line as the demand curve.

In regards to MR curve, "it will be the same as the average revenue curve, since selling one more unit at a constant price merely adds that amount to the total revenue". 1

If the price is constant, total revenue will rise at a constant rate as more is sold.

However, if the business "has a relatively large market share, it will face a downward-sloping demand curve".1 The significances of this is: if the business wanted to increase its sales it would require lower prices. On the other hand, if the business wanted to raise prices it would have an adverse affect on sale levels. In relation to AR, it will raise or fall with the raise or fall in price.

As mentioned before, businesses which face downward-sloping demand curve will have a MR that is less than its AR. The reason for this is because "the MR is the price at which its sells the last unit, minus the loss in revenue it has incurred by reducing the price on those units when it could otherwise have sold at the higher price".1

Normal profit means the opportunity cost if being in business. It also means the minimum return of