Question

Define Total Revenue, Average Revenue and Marginal Revenue with the help of examples. Explain the relationship between total revenue and marginal revenue with diagram.

Answer 1

Total Revenue: The total amount of money which a seller receives by selling given units of a commodity is called total revenue. It can be obtained by two ways:

• By summing up the marginal revenue receive by selling different units of commodity. TR = MR₁+ MR₂ + MR₃ + MR₄…… + MR_n = ΣMR 
• By multiplying average revenue (price) by number of units of commodity sold. TR = AR (P) × Q

E.g. suppose by selling 10 units of a commodity money received by seller is 50.Then his total revenue is Rs 50.

Average Revenue: It is the revenue per unit of a commodity sold. This can be obtained by dividing total revenue by number of units of commodity sold.

AR = TR /Q

 

E.g. suppose by selling 10 units of a commodity money received by seller is 50. Then AR will be as follows-

Marginal Revenue - The change in total revenue by selling an additional unit of a commodity is called marginal revenue.

It can be obtained by two formula-

MR =TR_n - TR_n-1 or MR = ΔTR  / ΔQ

E.g. suppose by selling 10 units of a commodity money received by seller is Rs 50 and by selling 11 units, he receives Rs 54 .Then MR will be as follows-

Relationship between marginal revenue and total revenue.

• When marginal revenue is positive, total revenue increases. 

• When marginal revenue is zero, total revenue is maximum. 

• When marginal revenue is negative, total revenue decreases.