Total revenue is price x quantity sold; average revenue is revenue per unit; profit is revenue minus cost.
Revenue is the money a firm receives from selling its output. Total revenue (TR) = price x quantity sold. Average revenue (AR) = TR / quantity sold. If every unit sells at the same price, AR equals the price.
Sales affect revenue directly. Selling more units at the same price raises TR. The effect of a price change on TR depends on price elasticity of demand. With elastic demand, a price cut raises sales enough to raise TR.
Revenue is not profit. Profit = TR - TC. A firm can raise its revenue but still make a loss if costs rise faster.
Firms track revenue to judge whether sales are growing and whether a price change worked.
- Total revenue (TR)
- Price x quantity sold.
- Average revenue (AR)
- TR / quantity; equals price when all units sell at one price.
- Profit
- TR - TC.
Worked example: Revenue and profit at a food stall
A stall sells 300 plates of noodles a day at $5. Its total cost is $1,100 a day.
- TR = $5 x 300 = $1,500.
- AR = 1,500 / 300 = $5, the same as the price.
- Profit = 1,500 - 1,100 = $400 a day.
- If it cut the price to $4.50 and sold 360 plates, TR would be $1,620.
Watch out for this
A firm with high revenue must be making high profit.
Profit depends on costs too. A firm with $10 million revenue and $11 million costs makes a loss.
Check your understanding
A firm sells 2,000 units at $8 each. What are its total revenue and average revenue?
- TR = $16,000; AR = $8
- TR = $8; AR = $16,000
- TR = $2,000; AR = $8