Average revenue refers to the revenue earned per unit of output produced. Simply put, it’s the income a seller earns for each unit of a product sold. The average revenue (AR) can be calculated by dividing total revenue (TR) by the total output (Q):

AR=TR/Q

Where:

• AR = Average Revenue
• TR = Total Revenue
• Q = Quantity of Output

For businesses selling multiple units of the same product at a uniform price, the average revenue is identical to the price. However, if products are sold at varying prices, the average revenue will differ accordingly.

Role of Average Revenue in Profit Estimation

Average revenue is a key factor in estimating a business’s profitability. To calculate profit, the average cost (AC) is subtracted from the average revenue. This simple calculation helps businesses assess if they are operating profitably on a per-unit basis.

Relationship Between Average Revenue and Market Structures

The nature of the market structure significantly impacts the relationship between average revenue and the quantity produced:

• Perfect Competition: In a perfectly competitive market, average revenue is equal to both the price and marginal revenue. This is because the products are sold at a standardized price, and firms cannot influence prices.

• Monopoly and Oligopoly: For monopolistic and oligopolistic firms, average revenue typically exceeds marginal revenue. These firms have more control over pricing and can adjust prices based on the demand for their products, leading to a distinction between the average and marginal revenue.

Understanding average revenue is essential for Class 12 Economics students, as it plays a vital role in analyzing market dynamics and estimating business profitability. For more such insightful concepts in economics, stay tuned to our website.