Calculation of TR and AR
Microeconomic Decision‑Makers: Firms’ Costs, Revenue & Objectives
What is Total Revenue (TR)?
TR is the total amount of money a firm gets from selling its goods. Think of a lemonade stand: if you sell each cup for $1 and you sell 50 cups, your TR is $50.
Formula: $$TR = P \times Q$$ where $P$ = price per unit, $Q$ = quantity sold.
What is Average Revenue (AR)?
AR is the revenue you get from each unit sold. It is simply the price you charge, because every unit brings in the same amount of money.
Formula: $$AR = \frac{TR}{Q} = \frac{P \times Q}{Q} = P$$
So, if you sell lemonade at $1 per cup, your AR is $1.
Calculating TR and AR – Example
- Suppose a firm sells 200 units at $5 each.
- TR = $5 × 200 = $1,000.
- AR = TR ÷ 200 = $1,000 ÷ 200 = $5.
Quick Reference Table
| Variable | Symbol | Formula |
|---|---|---|
| Total Revenue | $TR$ | $P \times Q$ |
| Average Revenue | $AR$ | $TR \div Q = P$ |
Why Does AR Equal Price?
In a competitive market, firms are price takers: they cannot influence the market price. Therefore, each unit sold brings in the same amount of money – the market price. This makes AR equal to the price.
Practice Question
💡 A bakery sells 120 loaves of bread at $3 each. Calculate the TR and AR.
Answer: TR = $3 × 120 = $360. AR = $360 ÷ 120 = $3.
Key Takeaways
- TR tells you the total money earned from sales.
- AR tells you the money earned per unit sold.
- In perfect competition, AR = price.
- Use the formulas to calculate quickly.
Revision
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