# Total revenue, average revenue and marginal revenue of the perfectly competitive firm

After you have worked through this section of the learning unit, you should be able to:

• distinguish between total revenue, average revenue and marginal revenue of the perfectly competitive firm

Total revenue is the income brought into the firm from selling its products. It is calculated by multiplying the price of the product by the quantity of output sold:

$$\text{Total Revenue} = {\text{price x quantity}}$$

$$\text{TR} = {\text{P x Q}}$$

If the price of a product is R100 and the firms sells 20 units, the total revenue of the firm is R100 x 20 = R2 000.

### If the market price for a fried chicken piece is R4, what is the total revenue of Funky Chicken if it sells ______?

• 1 piece of fried chicken
• 4 pieces of fried chicken
• 10 pieces of fried chicken

For one piece of fried chicken, it is R4 x R1 = R4, for four pieces it is R4 x 4 = R16 and for ten pieces it is R4 x 10 = R40. As its sells more, its total revenue increases.

Average revenue is the revenue generated per unit sold and is calculated by dividing the total revenue by the quantity sold.

$$\text{Average Revenue} = {\text{total revenue} \over \text {quantity}}$$

$$\text{AR} = {TR \over Q}$$

If the total revenue of a firm is R5 000 and the quantity sold is 1 000, then the average revenue per unit is R5 000 ÷ 1 000 = R5.

### What is the average revenue of Funky Chicken if its total revenue is _____?

• R12 and the number of units sold is 3
• R20 and number of units sold is 5

If total revenue is R12 and the number of units sold is three, then the average revenue is R12 ÷ 3 = R4; and if total revenue is R20 and the number of units sold five, it is R4. You will see later that for a firm under perfect competition, its average revenue is equal to the price.

Marginal revenue (MR) is the increase in total revenue that results from the sale of one additional unit of output. Marginal revenue is calculated by dividing the change in total revenue by the change in quantity.

$$\text{Marginal Revenue} = {\text {change in total revenue} \over \text {change in quantity}}$$

$$\text{MR} = {∆TR \over ∆Q}$$

If a firm sells one additional unit for R100, the marginal revenue of the firm is R100.

### Given the following information for Funky Chicken, calculate the marginal revenue for the 4th and 5th unit.

The total revenue for three units is R12, and the total revenue for four units is R16.
By increasing its sales from four to five units, the total revenue for Funky chicken increases from R16 to R20.

By selling the 4th unit, the marginal revenue is R4 and by selling the 5th unit, the marginal revenue is R4. As you will shortly see, for a firm under perfect competition, the marginal revenue is equal to the price.