Revenue

Definition of revenue

Definition of revenue

• Revenue is the income a firm earns from selling its goods or services over a period of time

1. Total revenue (TR)

• The total amount of money received from selling all output

  • Some firms sell a single product and it is easy to calculate their revenue

  • Other firms may sell thousands of products and revenue calculations can be more complex

  $\mathrm{Total} \mathrm{revenue} \left(\mathrm{TR}\right) = \mathrm{Selling} \mathrm{price} \left(\mathrm{P}\right) \mathrm{x} \mathrm{Quantity} \mathrm{sold} \left(\mathrm{Q}\right)$

• If a firm sells 200 units at $5 each,

  TR = 5×200 = $1,000

2. Average revenue (AR)

• The revenue earned per unit sold

  $\mathrm{Average} \mathrm{revenue} \left(\mathrm{AR}\right) = \frac{\mathrm{TR}}{\mathrm{Q}}$
  

• Since AR = TR ÷ Q, and TR = P × Q, it follows that average revenue = price per unit

• If TR is $1,000 from selling 200 units,

  AR = 1000 / 200 = $5

• Average revenue information is especially useful to a firm selling multiple products (e.g. supermarkets) or a firm that sells the same item at different prices

  • For example, rail tickets are usually priced differently for different types of commuters such as students and pensioners

The influence of sales on revenue

The influence of sales on revenue

• A firm’s revenue is directly influenced by the number of units it sells, making sales volume a key driver of total revenue (TR)

How sales affect total revenue (TR)

• Total revenue = price × quantity sold

• This means that an increase in the number of units sold (sales volume) will increase TR, assuming the price per unit stays the same

• Conversely, if sales fall, total revenue will decrease, even if the price remains unchanged

Impact of price changes on sales

• In elastic markets, a fall in price may lead to a large rise in sales, significantly boosting revenue

• In inelastic markets, lowering price may have little effect on sales volume, so revenue is able to increase

• Gain more understanding of the revenue rule by reading the notes on PED and total revenue

Importance in business decisions

• Understanding the relationship between sales volume and revenue helps businesses set pricing strategies, plan output, and forecast profits

• A firm may choose to increase advertising or reduce prices to boost sales and therefore increase revenue, but only if demand is responsive