Difference between Average Revenue and Marginal Revenue

Average Revenue

The Average Revenue is defined as the revenue that an organisation can avail by selling a unit of their product or service. You can obtain the average revenue by dividing the total revenue for a specific duration by the number of units sold during that same period. It is an important economic concept that helps businesses analyse whether their revenue per item is increasing or decreasing over a period of time. It allows an enterprise to estimate the earnings from its operations. The profits in a business are the difference between the Average Revenue and average cost. The market structure heavily influences the Average Revenue of a firm. In a perfectly competitive market, the Average Revenue is equal to the price of a product and the marginal revenue, while in a monopolistic or oligopolistic market it is higher than the marginal revenue.

Marginal Revenue

The Marginal Revenue is defined as the income that an organisation can avail of by selling an additional unit of their product or service. You can obtain the Marginal Revenue by dividing the change in total revenue by the change in the number of units sold. It is also a very important economic concept that helps businesses analyse whether producing an additional unit of a product or service leads to an increase or decrease in its earnings. It is the basis of the concept of diminishing marginal utility. Marginal Revenue remains constant till the firm achieves a certain level of output. Beyond that, it will start decreasing as per the law of diminishing returns. The management uses this concept to understand the customer demand for their products, set the price and plan production schedules accordingly. The market structure also influences the Marginal Revenue of a firm. In a perfectly competitive market, the marginal revenue is equal to the price of a product and the average revenue, while in a monopolistic or oligopolistic market it is lower than the Average Revenue.

Differences between Average Revenue and Marginal Revenue

Some of the significant differences between Average Revenue and Marginal Revenue are as follows:

Average Revenue

Marginal Revenue

Definition

The Average Revenue is defined as the revenue that an organisation can avail by selling a unit of their product or service.

The Marginal Revenue is defined as the income that an organisation can avail by selling an additional unit of their product or service.

Formula

Average Revenue = Total revenue/total quantity

Marginal Revenue = Change in total revenue/change in total quantity

Effect of the Market Structure

The market structure influences the Average Revenue of a firm. In a perfectly competitive market, the average revenue is equal to the price of a product and the Marginal Revenue, while in a monopolistic or oligopolistic market it is higher than the Marginal Revenue.

The market structure also influences the Marginal Revenue of a firm. In a perfectly competitive market, the marginal revenue is equal to the price of a product and the Average Revenue, while in a monopolistic or oligopolistic market, it is lower than the Average Revenue.

Uses

The Average Revenue helps a firm analyse whether the earnings from producing a unit is decreasing or increasing over a period of time.

The Marginal Revenue helps a firm analyse whether the earnings from producing an additional unit is increasing or decreasing over a period of time.

Example

If a firm is producing 100 units of a product and their total revenue is Rs.100000, then the Average Revenue of a firm is:

Average Revenue = 100000/100 = Rs. 1000 per product

If a total revenue of a firm is Rs.100000 for 100 units of a product and Rs. 101000 for 101 units of a product, then the Marginal Revenue of a firm is:

Marginal Revenue = (101000 – 100000)/(101 – 100) = Rs. 1000

Conclusion

There are stark differences between Average Revenue and Marginal Revenue. But a firm needs both these economic concepts to decide on the optimal levels of production for their commodity. They also need these two figures to analyse whether the current selling price of their product needs any change.

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