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 interest.
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, should the enterprise want to sell some amount of the commodity, the cost price that it sets is exactly equivalent to the market cost price.
Types Of Revenue
- Total Revenue: Total revenue is the total receipts a vendor can procure from selling commodities or service to customers. It can be mentioned as P × Q, which is the cost price of the commodities multiplied by the amount of the sold commodities. Then, total revenue (TR) of an enterprise is defined as the market cost price of the commodity (p) multiplied by the enterprise’s output (q). Hence,
TR = p × q
- Average Revenue: Average revenue is the revenue initiated per unit of output sold. It plays a vital role in taking the decision of an enterprise’s profit. Per unit profit is average(total) cost subtracted by 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 that is 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. Marginal revenue is used by management in analysing customer demand, plan the production schedules and set product prices. Marginal revenue remains constant till a certain level of output, and then it slows down with increasing 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 such interesting topics, stay tuned to BYJU’S.