Revenue Concept – SS2 Economics Lesson Note (Second Term)

Revenue refers to the income derived by a producer or firm from business activities or the sale of his or its products.

Behavioural objectives

By the end of the lesson, students should be able to:

• define revenue;
• state the three types of revenue: total, average and marginal revenue;
• calculate total revenue and average revenue;
• read a revenue schedule of a firm;
• state the output at which a firm is most profitable.

What are the types of revenue?

Total revenue (TR)

This refers to the total income which a firm derives from the sale of its products.

Total Revenue = Price x Quantity (TR = P x Q)

Average revenue (AR)

The average revenue is the same as the price per unit of the commodity. It is derived by dividing the total revenue by the total units of the commodity sold.

Average Revenue = Total Revenue ÷ Quantity Sold = Price (AR = TR ÷ Q = P)

Marginal revenue (MR)

This is the additional income earned by selling an extra unit of a commodity.

What does the revenue schedule of a firm look like?

At what output is a firm most profitable?

The most profitable output is the point where marginal cost is equal to marginal revenue.

Evaluation

1. Define revenue.
2. State the formula for total revenue.
3. Explain the relationship between average revenue and price.
4. Using the schedule, find the average revenue when 3 units are sold.
5. At what output is a firm most profitable?

Assignment

Using the revenue schedule, state the marginal revenue when output increases from 4 units to 5 units, and explain how you obtained it.