Revenue Schedules And Curves - SS2 Economics Lesson Note
Revenue curves show how a firm's revenue changes as it changes the quantity of output it produces. There are three types of revenue curves: total revenue, average revenue, and marginal revenue.
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Total Revenue (TR) Curve: This curve shows how a firm's total revenue changes as it changes the quantity of output it produces. The TR curve slopes upward initially but eventually becomes flat as output increases.
Average Revenue (AR) Curve: This curve shows how a firm's average revenue changes as it changes the quantity of output it produces. The AR curve is always equal to the price of the goods being sold.
Marginal Revenue (MR) Curve: This curve shows how a firm's marginal revenue changes as it changes the quantity of output it produces. The MR curve slopes downward as output increases.
The relationship between TR, AR, and MR.
Given the revenue schedule below:
|
Quantity |
Q
Total Revenue
TR
AVERAGE REVENUE
AR
MARGINAL REVENUE
MR
1
55
5
5
2
10
5
5
3
15
5
5
4
20
5
5
5
25
5
5
6
30
5
5
7
35
5
5
8
40
5
5
|
9 |
45
5
5
10
50
5
5
The relationship between these three revenue concepts can be summarized as follows:
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When a company sells more units of its product or service, its total revenue increases.
As total revenue increases, the average revenue per unit can either stay the same, increase, or decrease depending on the situation.
When a company sells an additional unit of its product or service, the marginal revenue is the revenue generated by that additional unit. If the marginal revenue is positive, it means that selling one more unit is profitable and will increase the total revenue. If the marginal revenue is negative, it means that selling one more unit will decrease the total revenue