The meaning of revenue
Revenue (or turnover) is the income generated from the sale of output in product markets. There
are two main revenue concepts to grasp at this stage:
Average Revenue (AR) = Price per unit = total revenue / output
Marginal Revenue (MR) = the change in revenue from selling one extra unit of output
The table below shows the demand for a product where demand varies inversely with the price.
Average and marginal revenue – the important relationships
In our example in the table above, as price per unit falls, demand expands and so too does total
revenue, although because the demand curve is downward sloping, the average revenue falls as
more units are sold. This causes marginal revenue to decline. Eventually once marginal revenue
becomes negative, a further fall in price (e.g. from £220 to £190) causes total revenue to fall.
Because the price per unit is declining, total revenue is rising at a decreasing rate and will
eventually reach a maximum (see the next paragraph).
Elasticity of demand and total revenue
When a firm faces a perfectly elastic demand curve, then average revenue = marginal revenue
(i.e. extra units of output can all be sold at the ruling market price). 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. In fact he MR curve will fall at twice the rate of the AR
curve. You don’t have to prove this for the exams – but it is worth remembering that the
marginal revenue curve has twice the slope of the AR curve!
The total revenue for any business is maximised when marginal revenue (MR) = zero. Once MR
becomes negative, total revenue falls if extra units are sold. This is shown in the next diagra. Total revenue is shown by the area underneath the firm’s demand curve (average revenue curve).
Market structure is best defined as the organisational and other characteristics of a market. We
focus on those characteristics which affect the nature of competition and pricing – but it is
important not to place too much emphasis simply on the market share of the existing firms in an
Traditionally, the most important features of market structure are:
The number of firms (including the scale and extent of foreign competition)
The market share of the largest firms (measured by the concentration ratio – see
The nature of costs (incl