Total Revenue, Average Revenue, and Marginal Revenue

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)
100	100	10000	100	100
100	200	20000	100	100
100	300	30000	100	100
100	400	40000	100	100
100	500	50000	100	100
100	600	60000	100	100
100	700	70000	100	100
100	800	80000	100	100
100	900	90000	100	100
100	1000	100000	100	100

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)
1000	100	100000	1000	1000
900	300	270000	900	850
800	500	400000	800	650
700	700	490000	700	450
600	900	540000	600	250
500	1100	550000	500	50
400	1300	520000	400	-150
300	1500	450000	300	-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.