Explain the Relationship Between TR, AR, and MR with the Help of a Table and Diagram
Understanding the relationship between Total Revenue (TR), Average Revenue (AR), and Marginal Revenue (MR) is crucial for businesses to make informed decisions about pricing, production, and overall strategy. This article delves into the intricacies of these three key economic concepts, using a table and diagram to illustrate their interconnections.
What is Total Revenue (TR)?
Total Revenue is the total amount of money a company earns from selling its products or services over a specific period. It is calculated by multiplying the price of the product or service by the quantity sold. The formula for TR is:
| TR | = | Price | 脳 | Quantity Sold |
|---|
What is Average Revenue (AR)?
Average Revenue is the revenue generated per unit of output. It is calculated by dividing the Total Revenue by the quantity sold. The formula for AR is:
| AR | = | TR | 梅 | Quantity Sold |
|---|
What is Marginal Revenue (MR)?
Marginal Revenue is the additional revenue a company earns from selling one more unit of a product or service. It is calculated by taking the change in Total Revenue and dividing it by the change in Quantity Sold. The formula for MR is:
| MR | = | 螖TR | 梅 | 螖Quantity Sold |
|---|
Now, let’s visualize the relationship between these three concepts using a diagram.
The diagram above shows how TR, AR, and MR are related. As the quantity sold increases, TR increases, which in turn affects AR and MR. The relationship between these three variables can be summarized as follows:
- When TR increases: AR may increase or decrease, depending on the quantity sold. If the quantity sold increases at a faster rate than TR, AR will decrease. Conversely, if the quantity sold increases at a slower rate than TR, AR will increase.
- When AR increases: MR may increase or decrease, depending on the relationship between AR and MR. If AR increases at a faster rate than MR, MR will increase. If MR increases at a faster rate than AR, MR will decrease.
- When MR increases: TR will increase, as long as the quantity sold increases. If MR decreases, TR will decrease, assuming the quantity sold remains constant.
Let’s consider an example to illustrate this relationship. Suppose a company sells 100 units of a product at $10 each, resulting in a TR of $1,000. The AR is $10, and the MR is also $10. Now, if the company increases the price to $12 and sells 110 units, the new TR will be $1,320, AR will be $12, and MR will be $12. In this case, both AR and MR have increased, as the quantity sold has increased at a slower rate than TR.
Understanding the relationship between TR, AR, and MR can help businesses make strategic decisions. For instance, if a company wants to maximize its profits, it may need to adjust its pricing strategy based on the relationship between these three variables. By analyzing the data, businesses can determine the optimal price point that maximizes their revenue and profit margins.
In conclusion, Total Revenue, Average Revenue, and Marginal Revenue are interconnected economic concepts that provide valuable insights into a company’s financial performance. By understanding their relationship, businesses can make informed decisions about pricing, production, and overall strategy.
