Understanding the Difference Between Marginal & Total Revenue

The Marginal Revenue and Total Revenue Difference

In basic terms, revenue is the sum that a business earns from the selling of an output. The revenue of a company is the profits or sales receipts of the company. In a company, revenue is divided into three types:

  • Total revenue
  • Average revenue
  • Marginal revenue

Total Revenue

Total revenue is the overall revenue of the sum earned from the selling of an output. Thus, the net revenue depends on the price per unit of production and the units sold. The formula below is used to determine total revenue. 

TR = Q x P

TR – Total revenues

Q – Revenue quantity (sold units)

P – Price per unit of production

Average Revenue

If you divide the total revenue by the total units sold, you can get the average revenue. In order to determine your average revenue, use the following formula:

AR= TR/Q 

AR – Average revenue

TR – Total revenue

Q – Quantity of units sold

Marginal Revenue

Generally, marginal revenue is the amount of money that a business receives from the selling of an extra unit. In other words, this is the extra income that a business earns when an additional unit is sold. The following formula can be used to determine your marginal revenue.

MR = TRn – TRn-1

Or

MR= ΔTR/ΔQ

MR – Marginal revenue

ΔTR – Change in total revenue

ΔQ – Change in quantity sold

Thus, even a slight shift in actual revenue (AR) induces a much greater change in marginal revenue (MR). When AR decreases, MR decreases significantly. Similarly, as AR increases, MR increases to a greater degree as well. AR and MR are equal only if AR is constant.  

Relationships Between Marginal Revenue and Total Revenue

To understand the basic concepts of sales, the relationship between total revenue (TR) and marginal revenue (MR) cannot take the backseat. All three curves start at the same point. However, the TR curve slopes upwards when the MR is positive. Additionally, if the MR decreases with a rise in sales quantity, the TR curve will rise in height at a decreasing rate. The TR curve reaches its full height when the MR curve crosses the X-axis. Furthermore, if the MR curve is below the X-axis, the TR curve begins to slope downwards. Any change in AR induces a much larger change in MR. Thus, if the AR curve has a negative slope, the MR curve has a more massive slope.

Revenue Problems Solved

Q1. What is total revenue, and how is this calculated?

Answer: Generally, the total revenue is defined as the total amount of money earned from the selling of an output. Thus, the net revenue depends on the number of units sold and the price per unit of production. 

Q2. What is marginal revenue, and how is this calculated mathematically?

Answer: In simple terms, marginal revenue is the amount of money earned from the selling of an additional unit. The formula for estimating marginal revenue is as follows:

MR = TRn – TRn-1

Or

MR= ΔTR/ΔQ

Interrelationship Between Total Revenue and Marginal Revenue 

Total revenue is significant because, in an attempt to raise profitability, businesses try to optimize the gap between their total revenues and total costs. However, understanding the subtleties of the relationship between revenues and expenses separates the best business managers from the novices. Marginal revenue is significant because it calculates the rise in revenue from more goods and services. Marginal revenue follows the rule of decreasing returns, which states that any increase in demand would result in smaller output. It means that the optimum level has passed.  

Calculation of Total Revenue

The calculation of total revenue also takes into account timetables. For example, the restaurateur may measure the quantity of cheese sold in an hour or during the business day. In the above case, the total daily revenue will be:

TR = Q×P

TR – Total Revenues

Q – Quantity 

P – Price

When real values are input into the formula, assuming the price of cheese per unit is $2 and quantity is 300, hence, total revenue will be 300 X $2 which is equal to $600. 

Example of Total revenues and Marginal revenues 

To measure marginal revenue, divide the change in total revenue by the difference in the quantity sold. The marginal revenue is thus the slope of the total revenue curve. Use the total revenues to calculate the marginal revenue. For example, suppose that a company making toys sells one unit of product at $10 for each of its first 100 units of the total product. However, if it sells 100 toys, the revenue will be $1,000 (100 x 10). The company is selling the next 100 toys for $8 a unit. Its total revenues will be $1,800 (1,000 + 100 x 8).

Conclusion

In simple terms, the total revenue is the total amount of money generated from the sale of goods and services. It decides how well a business makes money from its core sector based on demand and price. Marginal revenue calculates the rise in sales from the sale of an additional unit of products or services. It allows management to decide if it is in the best interest to manufacture and sell more.  

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