Economics
Total revenue represents all the company income. Total revenue is calculated by multiplying the price of products with the quantity sold. Typically, total revenue is calculated as follows:
Total revenue = price x quantity
Where price (P) and quantity (Q).
Total revenue=PxQ
As being revealed in Table 1, total revenue is calculated by multiplying price with quantity, when firm produces 2 quantities of goods, firm's total revenue is $10, however, when a firm produces 3 quantities of goods, its total revenue is $15.
Marginal revenue is an additional revenue that a firm generates when a firm sells additional unit of output. The marginal revenue plays an important role in the perfectly competitive firm where a perfectly competitive firm maximizes its profit when marginal revenue is equal to marginal cost. The formula used to calculate marginal revenue is:
Marginal revenue= Change in total revenue/Change quantity.
The average revenue is calculated by dividing the total revenue by the quantity produced.
The table below summarizes a firm's marginal revenue:
Table 1: Total Revenue and Marginal Revenue of a Perfect Competitive Firm ($)
Quantity
Price
Total Revenue
Marginal Revenue
Average revenue
0
5
0
5
0
1
5
5
5
5
2
5
10
5
5
3
5
15
5
5
4
5
20
5
5
5
5
25
5
5
6
5
30
5
5
7
5
35
5
5
8
5
40
5
5
9
5
45
5
5
10
5
50
5
5
Within the perfect competitive market structure, perfect competitive firms are price takers because they have no control of the market and they receive the market price offered to them in the market. In the market competition, there are many firms selling identical products and each firm charges the same market price for the goods sold because a firm has to charge the market price to remain in business. Charging above the market price will make firms to lose its customers and charging below the market price will makes firms to lose profits.
Under perfect competition, the price is constant making firms to earn the same marginal...
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