💰 Total revenue
TR = price × quantity sold. If a firm sells 200 items at $3 each, TR = 200 × $3 = $600.
Costs, Revenue and Objectives » Revenue and the Objectives of Firms
What you'll learn this session
Study time: 30 minutes
Cambridge spec: 3.6.3, 3.6.4, 3.6.5
- Define total revenue and average revenue
- Calculate TR and AR, and see how sales change revenue
- Know four objectives of firms: survival, social welfare, profit maximisation and growth
- Explain why a firm might choose each objective
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Unlock This CourseWhat is revenue?
Revenue is the money a firm receives from selling what it makes. Costs are what the firm pays out. Revenue is what it earns. Economists use two measures of revenue.
Key terms:
- Total revenue (TR): the total amount of money a firm receives from selling its output.
- Average revenue (AR): the revenue the firm receives for each unit sold.
Calculating TR and AR
🧮 Average revenue
AR = TR / quantity sold. Using the same firm, AR = $600 / 200 = $3 per item.
Notice that AR came out the same as the price. When a firm sells all its output at one price, AR equals the price. That gives a quick check in the exam.
Worked example 1: Kelvira Snacks
Kelvira Snacks sells 350 bags of nuts a week at $4 a bag.
TR = price × quantity = $4 × 350 = $1,400.
AR = TR / quantity = $1,400 / 350 = $4.
Check: AR equals the price, so the answer makes sense.
Worked example 2: working backwards
A firm in Torvane has a total revenue of $4,500 from selling 150 books.
AR = TR / quantity = $4,500 / 150 = $30.
So each book was sold for $30. If you are given AR and quantity instead, multiply them to find TR.
How sales change revenue
Revenue depends on both the price and the number of items sold. If the price stays the same, selling more always raises TR. Here is a made-up table for Corvin Cycles, which sells bicycle helmets at $8 each.
| Helmets sold | Price ($) | TR ($) | AR ($) |
|---|---|---|---|
| 100 | 8 | 800 | 8 |
| 200 | 8 | 1,600 | 8 |
| 300 | 8 | 2,400 | 8 |
| 400 | 8 | 3,200 | 8 |
Every extra 100 helmets adds $800 to TR. AR stays at $8 because the price has not changed.
Often a firm must cut its price to sell more. Now two things pull in different directions. Selling more raises TR, but a lower price lowers it. Here is another made-up firm, Dalmere Mugs.
| Price ($) | Quantity sold | TR ($) | AR ($) |
|---|---|---|---|
| 10 | 100 | 1,000 | 10 |
| 9 | 130 | 1,170 | 9 |
| 8 | 150 | 1,200 | 8 |
| 7 | 160 | 1,120 | 7 |
TR rises as the price falls from $10 to $8, then falls again at $7. More sales do not always mean more revenue. Whether TR rises or falls depends on how much the quantity sold responds to the price. That idea is covered in PED, Consumer Spending and Firms' Revenue.
Revenue is not profit. Profit is what is left after the costs are paid: profit = TR − TC. If TR is $600 and total cost is $450, profit is $150. Total cost was covered in Costs of Production.
The objectives of firms
An objective is the main aim a firm is working towards. Firms do not all want the same thing. There are four objectives you need to know.
Key terms:
- Survival: aiming to stay in business, by earning enough revenue to cover costs.
- Social welfare: aiming to benefit the community, such as workers, customers or the environment, rather than just making money.
- Profit maximisation: aiming to make the biggest possible gap between TR and TC.
- Growth: aiming to become a bigger firm, with more sales, more customers or a larger share of the market.
🌱 Survival
Likely for a new firm, which may have no loyal customers yet. Also likely in a recession or when a strong rival has arrived. If the firm does not cover its costs, it closes.
🤝 Social welfare
Likely for a government-owned firm or a firm set up mainly to help people, such as a charity-run business. It may pay fair wages, protect the environment or sell cheaply to people on low incomes.
📈 Profit maximisation
Likely when owners want the highest possible reward for the risk they have taken. The firm tries to raise TR and cut costs so that TR − TC is as large as possible.
🏢 Growth
Likely for a firm that wants a bigger market share or lower average costs from a larger scale. It may accept low profit now to earn more later.
A firm can have more than one objective, and its objective can change over time. A new cafe in a made-up town called Merrow may aim only to survive in its first year, then aim for growth by opening a second shop.
Common mistakes
1. Mixing up revenue and profit. Revenue is all the money received. Profit is TR minus TC.
2. Dividing the wrong way round. AR = TR / quantity, not quantity / TR.
3. Saying that more sales always means more revenue. If the price had to fall, TR might not rise.
4. Saying every firm wants maximum profit. Survival, social welfare and growth are also real objectives.
Exam-style question
Orsolo Juice Bar is a small firm in the made-up city of Kamari. In one week it sold 800 cups of fruit juice at $2.50 a cup. The owner has just opened and is worried that a large rival nearby could take away customers.
(a) Calculate the total revenue and the average revenue of Orsolo Juice Bar for the week. [3 marks]
(b) Explain why survival might be the objective of Orsolo Juice Bar. [3 marks]
(c) Explain one reason why a firm might choose growth rather than profit maximisation as its objective. [3 marks]
Model answer
(a) TR = price × quantity = $2.50 × 800 (1) = $2,000 (1). AR = TR / quantity = $2,000 / 800 = $2.50 (1).
(b) The juice bar is new, so it has few regular customers (1). A large rival nearby could take customers away, so revenue might fall short of costs (1). The owner's first aim is therefore to earn enough to cover costs and stay open (1).
(c) A firm may choose growth to gain a bigger share of the market (1). A bigger firm may get lower average costs, for example from buying in bulk (1), and so could earn higher profit in the future even if profit is lower now (1).
Exam tip
For "Calculate" questions, write the formula first, then put the numbers in. You can earn a mark for the method even if the arithmetic slips.