What this lesson teaches
I can define total revenue and average revenue.
Syllabus K343, 3.6.3. Definition of revenue: definitions of total revenue (TR) and average revenue (AR)
I can calculate total and average revenue and explain how sales affect revenue.
Syllabus K343, 3.6.4. Calculation of revenue: calculation of TR and AR; the influence of sales on revenue
Make a guess
A stall sells 300 plates of noodles at $5 each. Its costs are $1,600. Is it making a profit?
- Yes, the profit is $1,500.
- Yes. It sold 300 plates, so it must profit.
- No. Its revenue of $1,500 is below its costs.
Show the answer
No. Its revenue of $1,500 is below its costs.
Revenue is $5 x 300 = $1,500. Profit is revenue minus cost, so the stall makes a $100 loss.
Total revenue is price x quantity sold; average revenue is revenue per unit; profit is revenue minus cost.
Revenue is the money a firm receives from selling its output. Total revenue (TR) = price x quantity sold. Average revenue (AR) = TR / quantity sold. If every unit sells at the same price, AR equals the price.
Sales affect revenue directly. Selling more units at the same price raises TR. The effect of a price change on TR depends on price elasticity of demand. With elastic demand, a price cut raises sales enough to raise TR.
Revenue is not profit. Profit = TR - TC. A firm can raise its revenue but still make a loss if costs rise faster.
Firms track revenue to judge whether sales are growing and whether a price change worked.
- Total revenue (TR)
- Price x quantity sold.
- Average revenue (AR)
- TR / quantity; equals price when all units sell at one price.
- Profit
- TR - TC.
Worked example: Revenue and profit at a food stall
A stall sells 300 plates of noodles a day at $5. Its total cost is $1,100 a day.
- TR = $5 x 300 = $1,500.
- AR = 1,500 / 300 = $5, the same as the price.
- Profit = 1,500 - 1,100 = $400 a day.
- If it cut the price to $4.50 and sold 360 plates, TR would be $1,620.
Try it step by step
Problem 1
A stall sells 200 meals a week at $12 each. Its fixed costs are $800 a week and its variable cost is $5 per meal.
Show the working
- Total revenue: 200 x $12 = $2,400
- Total cost: $800 + (200 x $5) = $1,800
- Profit or loss: $2,400 - $1,800 = $600 profit
Problem 2
A workshop sells 500 phone cases a month at $9 each. Its fixed costs are $1,500 a month and its variable cost is $4 per case.
Show the working
- Total revenue: 500 x $9 = $4,500
- Total cost: $1,500 + (500 x $4) = $3,500
- Profit or loss: $4,500 - $3,500 = $1,000 profit
Problem 3
A tuition centre sells 300 lessons a month at $10 each. Its fixed costs are $2,000 a month and its variable cost is $5 per lesson.
Show the working
- Total revenue: 300 x $10 = $3,000
- Total cost: $2,000 + (300 x $5) = $3,500
- Profit or loss: $3,000 - $3,500 = -$500, a loss
Watch out for this
A firm with high revenue must be making high profit.
Profit depends on costs too. A firm with $10 million revenue and $11 million costs makes a loss.
Check your understanding
A firm sells 2,000 units at $8 each. What are its total revenue and average revenue?
- TR = $2,000; AR = $8
- TR = $16,000; AR = $8
- TR = $8; AR = $16,000
Show the answer
TR = $16,000; AR = $8
Right. TR = 8 x 2,000, and AR = TR / quantity = price.
Check your understanding
A firm sells 400 units at $15 each. Its total cost is $4,500. What is its profit?
- $4,500
- $10,500
- $1,500
- $6,000
Show the answer
$1,500
Right. Total revenue is 400 x $15 = $6,000, and $6,000 - $4,500 = $1,500.
Check your understanding
A shop earns total revenue of $2,400 from selling 300 items. What is its average revenue?
- $720,000
- $8
- $0.125
- $2,100
Show the answer
$8
Right. Average revenue = total revenue / quantity = $2,400 / 300 = $8, the average price.