Revenue (Cambridge International IGCSE Economics)

Definition of revenue

Spec point — 3.6.3 · "• definitions of total revenue (TR) and average revenue (AR) • calculation of TR and AR "

Definition of revenue

• Revenue is the income a firm earns from selling its goods or services over a period of time

1. Total revenue (TR)

• The total amount of money received from selling all output $\text{Total} \text{revenue} (TR)=Selling \text{price} ( \mathrm{P} ) \mathrm{x} \text{Quantity} \text{sold} ( \mathrm{Q} )$

  • Some firms sell a single product and it is easy to calculate their revenue
  • Other firms may sell thousands of products and revenue calculations can be more complex

• If a firm sells 200 units at $5 each, TR = 5×200 = $1,000

2. Average revenue (AR)

• The revenue earned per unit sold $\mathrm{Average} \mathrm{revenue}(\mathrm{AR})=\frac{\mathrm{TR}}{Q}$

• Since AR = TR ÷ Q, and TR = P × Q, it follows that average revenue = price per unit

• If TR is $1,000 from selling 200 units, AR = 1000 / 200 = $5

• Average revenue information is especially useful to a firm selling multiple products (e.g. supermarkets) or a firm that sells the same item at different prices

  • For example, rail tickets are usually priced differently for different types of commuters such as students and pensioners

Worked Example Calculate the average revenue a firm will earn when the price changes by $1 from $1 to $8 **

** P ($)**	Q	**TR **$(P\times Q)$	**AR **$\frac{\mathrm{TR}}{Q}$
8	1	8	8
7	2	14	7
6	3	18	6
5	4	20	5
4	5	20	4
3	6	18	3
2	7	14	2
1	8	8	1

The influence of sales on revenue

Spec point — The influence of sales on revenue

• A firm’s revenue is directly influenced by the number of units it sells, making sales volume a key driver of total revenue (TR)

How sales affect total revenue (TR)

• Total revenue = price × quantity sold
• This means that an increase in the number of units sold (sales volume) will increase TR, assuming the price per unit stays the same
• Conversely, if sales fall, total revenue will decrease, even if the price remains unchanged

Impact of price changes on sales

• In elastic markets, a fall in price may lead to a large rise in sales, significantly boosting revenue
• In inelastic markets, lowering price may have little effect on sales volume, so revenue is able to increase
• Gain more understanding of the revenue rule by reading the notes on PED and total revenue

Importance in business decisions

• Understanding the relationship between sales volume and revenue helps businesses set pricing strategies, plan output, and forecast profits
• A firm may choose to increase advertising or reduce prices to boost sales and therefore increase revenue, but only if demand is responsive

Case Study Apple’s iPhone Pricing and Sales Strategy

In 2023, Apple released a new line of iPhones at a lower entry-level price than its previous generation. This move aimed to boost global sales, especially in emerging markets where consumers were more price sensitive.

Outcome

• Unit sales increased significantly, particularly in India and Southeast Asia
• Although the a verage price per unit fell, Apple’s total revenue increased due to the much higher quantity sold
• The strategy worked because demand for Apple’s products in these markets was relatively price elastic