Revenue

Revenue is the total amount of income generated by an enterprise through the sale of goods and services concerning the primary operations of the business. Several types of revenue include total revenue, average revenue, marginal revenue, etc. Revenue is essential for every enterprise because long-term sustainability would become problematic if the company does not earn revenue. 

The Law of Diminishing Returns

The law of diminishing returns says that all the factors are considered fixed, except the number of variable factors in a production process. The quantity of variable factors increases by the fixed-rate, and the production level increases by the decreasing rate.

Assumptions in Law of Diminishing Returns

There are assumptions in the law of diminishing returns. Some of them are:

• It is applied only when one-factor production is kept fixed or constant. 
• The production technique remains the same, and labour is homogeneous.

Limitations of the Law of Diminishing Returns

The law of diminishing returns has its limitations. Some of them are:

• It cannot be applied to all production scenarios. A good example is agriculture, where, whenever a new piece of land is acquired for cultivation, its productivity increases due to the use of fertilisers.

• It is applicable in the short run. 

Types of Revenue

Total Revenue

Total revenue is the total amount the seller collects from the sale of goods or services to the customers. The price of the commodity can be expressed as P× Q. It implies that the cost price of the commodity multiplies with the number of quantities sold. Total revenue can be defined as a market cost price of the goods multiplied by the number of units produced. Therefore, it can be said that TR= p × q, where TR Stands for total revenue, P stands for the price, and q stands for quantity. Total revenue is equal to the submission of all the marginal revenues TR = Total of MR.

Average Revenue

Average revenue represents the revenue per unit of output sold. Average revenue aggressively adds to the profit of any enterprise. To calculate the average revenue, the total cost is to be subtracted from the total profit. It is considered more profitable for an enterprise to manufacture more output. AR = TR/q; q = p× q / q = p (Where AR stands for average revenue, TR stands for total revenue, p stands for the price, and q stands for quantity)

Marginal Revenue

The term marginal revenue can be defined as revenue earned from the sale by adding a new unit or product. In other words, it can be said that marginal revenue is revenue generated by an enterprise by selling an additional unit. Company management uses marginal revenue to analyse customer demands, plan production schedules and set a new price for the products. By the law of diminishing returns, the revenue margin remains constant up to a certain level of output and then begins to slow down as the output increases. MR = change in total revenue/ change in quantity or TR/ Q (Where MR stands for marginal revenue, TR stands for total revenue and q stands for quantity).

Relationship Between TR, MR, AR 

• TR, MR, and AR are equal when the first units are sold. Due to this, all three come from the starting point. So as long as the MR is positive, TR tends to slope downward. 

• When the AR tends to decrease, MR should decrease faster than the AR. It means the downward sloping MR curve will be below the downward sloping AR (usually happens in monopoly or monopolistic competition).

• When the AR is constant, then MR is equal to the AR. Both are to be indicated by a similar horizontal straight line.

• MR can be negative, but AR cannot be negative.

Conclusion

The term revenue is the total receipts owned by the company by selling its goods and services. There are two main types of revenue: total revenue, average revenue, and marginal revenue. Each of them can be calculated using a specific method and are connected. Hence, it is crucial to understand each of them to understand revenue and its calculation better. We also have the law of diminishing returns, which plays a significant role in revenue assessment.