Revenue is defined as the amount a person receives by selling a certain quantity of the commodity. A commodity can be purchased in the market by paying a certain price. So, revenue can be calculated by multiplying price and quantity of the commodity.
Revenue = Price of the Commodity × Quantity of the Commodity
During a given period of time, the seller sells certain quantity of the commodity. So the total amount of money received by the seller during that time period is called total revenue (TR). If P is the price and Q is the quantity, then,
Total Revenue = Price × Quantity
TR = P × Q
Each and every commodity has its own price. A retailer sells different commodities to the buyers. For example, a seller sells various items in a provision store such as rice, wheat, wheat flour, different varieties of dal, biscuits, edible oil. There are varieties of rice such as basmati, parmal, cella; there are different types of edible oils, such as refined vegetable oil, sunflower oil, mustard oil, soyabean oil; and so on. A retail shopkeeper sells so many different kinds of goods as well as different types of the same good.
To calculate total revenue, first make a list of the prices of the goods he sold. Second, make a list of respective quantities of the goods. Third, find the total revenue of the shopkeeper.
Example: Consider that the shopkeeper has sold 100 kg of basmati rice, 70 litres of sun flower oil, 100 packets of biscuits and 150 kg of wheat flour in the given week. The prices are Rs. 35 per kg of Basmati rice, Rs. 90 per liter of sunflower oil, Rs. 10 per packet of biscuit and Rs. 22 per kg of wheat flour. Calculate the total revenue of the shopkeeper?
Total Revenue from all goods = Rs. 14,100. So, the shopkeeper’s total revenue from all goods during the given week is Rs. 14,100.
Average Revenue is calculated from the total revenue. The formula for average revenue is:
Average Revenue = Total Revenue / Quantity sold
AR = TR/Q
For a single commodity, TR = P × Q
So AR = P × Q/Q = P
Average Revenue and Price of the commodity are one and the same.
Marginal Revenue (MR) is defined as increase in total revenue due to one unit increase in the sale of the quantity of output.
Average revenue is calculated for each and every given level of sale of the output while marginal revenue is calculated for two successive levels of sale of the output. This is same as average cost and marginal cost.
Example 1.1: Price of 1 kg of guava is Rs. 50. The Vendor sold 20 kg of guava in two days. What is his average revenue?
Total Revenue is 50 × 20 = Rs 1000, when Quantity is 20 kg
So AR = 1000/20 = Rs. 50
Example 1.2: If the vendor could sell 21 kg of guava at the same price then what is the marginal revenue?
Now TR = 50 × 21 = Rs 1050. Earlier TR = Rs. 1000.
So MR = 1050 – 1000 = Rs. 50
Example 2: A shopkeeper sells 10 kg of rice at Rs 30 per kg and 11 kg of rice at Rs 29 per kg. What is the marginal revenue?
In the first case TR = 10 × 30 = Rs. 300
In the second case TR = 11 × 29 = Rs 319
So MR = 319 – 300 = Rs 19
Both revenue and cost are important concepts in economics. While cost is the expenditure incurred to produce a good or service during the production process, revenue is the money received by the producer by selling that good or service. So cost symbolises sacrifice made by the producer and revenue symbolises gains for the producer. By getting the required revenue from sale of the commodity the producer is able to recover the cost he has incurred earlier.
The producer earned his due share which is called profit. Profit is the surplus of revenue over the total cost of production.
Profit = Total Revenue - Total Cost