To study the revenues that firms receive from the sale of their products,
economists define three concepts called total, average, and marginal
revenue.
Total revenue (TR) is the total amount received by the firm from the
sale of a product. If Q units are sold at p dollars each,
Average revenue (AR) is the amount of revenue per unit sold. It is
equal to total revenue divided by the number of units sold and is thus
equal to the price at which the product is sold:
Marginal revenue (MR) is the change in a firm’s total revenue resulting
from a change in its sales by 1 unit. Whenever output changes by more
than 1 unit, the change in revenue must be divided by the change in
output to calculate the approximate marginal revenue. For example, if an
increase in output of 3 units is accompanied by an increase in revenue of
$1500, the marginal revenue is $1500/3, or $500. [ 21 ]
To illustrate each of these revenue concepts, consider a farmer who is
selling barley in a perfectly competitive market at a price of $3 per bushel.
TR=p×QAR= TQR = (p×QQ) =pMR=ΔΔTQR