9.

Revenue (2)
1. Revenue Concepts-total, average and marginal
Total revenue is not the only type of revenue we can talk about in economics. It is also
useful to examine average and marginal revenue for a firm. Average revenue (AR) is
defined as total revenue divided by quantity (AR=TR/Q) and marginal revenue (MR) is the
extra revenue generated from selling an extra unit of output (MR=TR/Q).
Quanti
ty

10

Total
Reven
ue ()

16

21

24

25

24

21

16

Averag
e
Reven
ue ()

N/A

Margin
al
Reven
ue ()

N/A

-1

-3

-5

-7

-9

1.1 Fill in the values for average and marginal revenue for the example above. Plot on the
diagram below both the AR and MR curves (the TR curve has been plotted for you). When
plotting MR, plot the value between quantity levels (this is because you are examining a
change value between output levels).

25

Revenue ()

Total
Revenue

20
15
10
5
0
0

6
Quantity

10

12

1.2 What does the AR curve remind you of? Demand curve
1.3 What is the relationship between TR and MR on your diagram? MR is the gradient function
of TR.
1.4 Can MR ever be negative? Explain your answer. Yes, because the total revenue can start to
decrease.
1.5 Is there any noticeable relationship between MR and AR in your diagram? The both
decrease.
2. True or False
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2.1 Total revenue can be increased if a firm faces inelastic demand by reducing prices.
True/False
2.2 Total revenue is equal to total profits minus total costs. True/False
2.3 Firms will always aim to maximise their total revenue. True/False

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