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Business Revenues

Author: Geoff Riley  Last updated: Sunday 23 September, 2012

Introduction

Revenue is the income generated from the sale of goods and services

  • Average Revenue (AR) = Price per unit = total revenue / output
  • Marginal Revenue (MR) = the change in revenue from selling one extra unit of output
  • Total Revenue (TR) = Price per unit x quantity

The table below shows the demand for a product where there is a downward sloping demand curve.


Price per unit
(average revenue)

Quantity Demanded
(Qd)

Total Revenue
(TR) (PxQ)

Marginal Revenue
(MR)

£s

units

£s

£s

340

460

156400

 

310

580

179800

195

280

700

196000

135

250

820

205000

75

220

940

206800

15

190

1060

201400

-45

Average and Marginal Revenue


Revenue growth at Amazon
Amazon’s growth has been both internal (organic) and external (via acquisitions). Revenue growth is particularly impressive. 
Consider the total revenue earned in the first five years.  Amazon achieved $2.8bn, compared with $1.5bn for Google and just $0.4bn for eBay. Amazon’s e-commerce business model can be summed up in three words (which underpin all its e-commerce activities):
- Convenience
- Low prices
- Large selection

In our example in the table, as price per unit falls, demand expands and total revenue rises although because average revenue falls as more units are sold, this causes marginal revenue to decline. Eventually marginal revenue becomes negative, a further fall in price (e.g. from £220 to £190) causes total revenue to fall.

Elasticity of Demand and Total Revenue

  • When a firm faces a perfectly elastic demand curve, then average revenue = marginal revenue
  • However, most businesses face a downward sloping demand curve! And because the price per unit must be cut to sell extra units, therefore MR lies below AR.
  • The MR curve will fall at twice the rate of the AR curve.

You don’t have to prove this for exams – but the marginal revenue curve has twice the slope of the AR curve!

  • Maximum total revenue occurs where marginal revenue is zero: no more revenue can be achieved from producing an extra unit of output.
  • This point is directly underneath the mid-point of a linear demand curve.
  • When marginal revenue is zero, the price elasticity of demand = 1

Business revenues

Total revenue is shown by the area underneath the firm’s demand curve (average revenue curve).

A shift in the average revenue curve (AR) will also bring about a shift in the marginal revenue curve (MR)
Seasonal revenues: Many businesses experience seasonal fluctuations in revenues because the strength of demand will ebb and flow at different times of the year. Good examples of seasonal shifts in demand and revenues include beer producers, chocolate and card retailers, tourist attractions, online dating sites, jewellers and perfumery businesses.





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