What is revenue?

Revenue is the earning that an enterprise has from its normal business pursuits, usually from the sale of commodities, and services to consumers. Revenue is also mentioned and referred to as turnover or sales. A few companies get revenue from royalties, other fees, or interests.

An enterprise believes that it can sell as many quantities of the commodity as it requires by setting a cost price less than or equivalent to the market cost price. In such a case, there is no logic to set a cost price lower than the market cost price. In other words, the enterprise should sell some amount of the commodity so that the cost price it sets is exactly equivalent to the market cost price.

Types of revenues

Total revenue: Total revenue is the total receipts a vendor can procure from selling commodities or services to the customers. It can be mentioned as P × Q, which is the cost price of the commodities multiplied by the amount of the commodities sold. So, the total revenue (TR) of an enterprise is defined as the market cost price of the commodity (p) multiplied by the enterprise’s output (q).


                                                                   TR = p × q

Average revenue: Average revenue is the revenue initiated per unit of the output sold. It plays a vital role in deciding an enterprise’s profit. Per unit of the profit is the average (total) cost subtracted by the average revenue. An enterprise usually prefers to manufacture the amount of output that maximises profit.

                                                           AR = TR/q = p × q/q = p

Marginal revenue: Marginal revenue is referred to as the revenue earned from the sale of an additional product or unit. It is the revenue that the company generates when there is a sale of an additional unit. It is used by the management in analysing the demands of the customers, planning the production schedules, and setting the product prices.

Marginal revenue remains constant till a certain level of output, and slows down with an increased output by following the law of diminishing returns.

                                                  MR = Change in total revenue/Change in quantity

This concludes the topic about the concept of revenue in commerce. To read more about such interesting topics, stay tuned to BYJUS.


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