Total Revenue (TR)

The total amount of money a firm receives from the sale of a given quantity of a good or service.

Total Revenue = Price × Quantity

At first, TR rises as output increases because selling more units raises total income. However, since the firm must lower its price to sell more (due to the downward-sloping demand curve), revenue eventually grows at a decreasing rate.

• The TR curve first increases, showing that total revenue rises as sales expand.

• It reaches a maximum point, where Marginal Revenue (MR) = 0 — meaning extra sales add no additional revenue.

• After this point, TR falls, as further output requires reducing the price so much that total revenue decreases.

This shape reflects the inverse relationship between price and quantity under a downward-sloping demand curve.

Average Revenue (AR)

The revenue earned per unit of output sold.

Average Revenue = Total Revenue / Quantity

Marginal Revenue (MR)

The change in total revenue resulting from selling one more unit of output.

Marginal Revenue = Change in Total Revenue ΔTR / Change in Quantity ΔQ

In this diagram, the AR (Average Revenue) curve represents the firm’s demand curve — showing the price consumers are willing to pay for different quantities of output. It slopes downward, indicating that to sell more units, the firm must lower the price.

The MR (Marginal Revenue) curve lies below the AR curve because, in order to sell an additional unit, the firm must reduce the price not just for that unit, but for all previous units sold. This causes marginal revenue to fall faster than average revenue.

Key relationships:

• AR = Price

• MR < AR when AR slopes downward

• The MR curve always has twice the slope of the AR curve (for a straight-line demand).

• The gap between AR and MR widens as quantity increases.

Price Elasticity of Demand (PED) and its Relationship to Revenue

Price Elasticity of Demand (PED) measures the responsiveness of the quantity demanded of a good to a change in its price.

The formula for the coefficient of Price Elasticity of Demand is:

PED = % Change in Quantity Demanded / % Change in Price

PED is typically a negative number because price and quantity demanded move in opposite directions (Law of Demand). However, in revenue analysis, economists often use the absolute value of the PED coefficient.

PED is the primary determinant of how a price change will affect a firm's Total Revenue.

• IF PED > 1 : Quantity demanded is highly responsive to price changes. | Lower the Price | The percentage increase in QD​ is greater than the percentage decrease in P, leading to a net gain in TR.

• If PED < 1: Quantity demanded is less responsive to price changes. | Raise the Price | The percentage decrease in Qd​ is less than the percentage increase in P, leading to a net gain in TR.

• If PED = 1: Quantity demanded changes by the exact same percentage as the price