All subjects · Economics · WEC13 Business behaviour

Total, average and marginal revenue, and PED

Edexcel IAL Economics · WEC13 Business behaviour

Revenue is the money a firm receives from sales. The links between total, average and marginal revenue, and their link to price elasticity of demand, appear in almost every Unit 3 diagram.

Practise this in the app: instant marking and a fix for every mistake. Free, no email needed to start.

Practise this lesson

Formulae

Total revenue: TR = P x Q
Average revenue: AR = TR / Q = P. So the AR curve is the demand curve.
Marginal revenue: MR = ΔTR / ΔQ, the extra revenue from selling one more unit.

Price takers and price makers

A price taker (perfect competition) can sell any amount at the market price, so P = AR = MR: a horizontal line.
A price maker faces a downward-sloping demand curve: to sell one more unit it must cut the price on all units, so MR < AR. With a straight-line demand curve, MR has the same intercept and twice the slope of AR, and cuts the output axis halfway to where AR does.

Revenue and PED

Where demand is price elastic (|PED| > 1), MR > 0: a price cut raises TR.
At unitary elasticity (|PED| = 1), MR = 0 and TR is at its maximum.
Where demand is price inelastic (|PED| < 1), MR < 0: a price cut lowers TR.

On a linear demand curve, the top half is elastic, the midpoint unitary and the bottom half inelastic. A profit maximiser with positive MC always produces where MR > 0, so in the elastic section.

Price ($)	Quantity	TR ($)	MR ($)
10	1	10	10
9	2	18	8
8	3	24	6
7	4	28	4
6	5	30	2
5	6	30	0

MR falls twice as fast as price and reaches zero where TR is highest.

Exam tip

In a 'calculate' question, write the formula, substitute, and give units (for example $ or $ bn). In the January 2021 WEC13 mark scheme, a 2-mark calculation answer that left out the unit 'bn' was awarded only 1 mark.

Worked example

A firm sells 400 units at $15. When it cuts price to $14 it sells 450 units. Find the change in TR and the marginal revenue per extra unit.

TR before = 15 x 400 = $6000.
TR after = 14 x 450 = $6300.
ΔTR = $300; ΔQ = 50.
MR = 300 / 50 = $6 per unit.

Answer: TR rises by $300; MR = $6, so demand is elastic over this range.

Key idea: TR = PQ; AR = P (the demand curve); MR = ΔTR/ΔQ. For a price maker MR < AR with twice the slope. MR > 0 elastic, MR = 0 unitary (TR max), MR < 0 inelastic.

Check yourself

A firm sells 2,500 units at $8 each. Find total revenue.
Show answer
$20000. TR = P x Q = 8 x 2,500 = $20,000.
Total revenue is $36,000 from 1,200 units. Find average revenue.
Show answer
$30. AR = TR / Q = 36,000 / 1,200 = $30, which is the price.
Selling 10 units at $20 each, a firm must cut the price to $19 to sell 11 units. Find the marginal revenue of the 11th unit.
Show answer
$9. TR rises from $200 to $209, so MR = $9. MR is below the price ($19) because the price fell on the first 10 units too.
A firm sells 30 units at $12. To sell 31 it must cut the price to $11.50. Find MR of the 31st unit.
Show answer
$-3.50. TR falls from $360 to $356.50, so MR = -$3.50. Negative MR means demand is inelastic here.
For a firm in perfect competition, which is true?
- MR is half of AR
- MR is greater than AR
- P = AR = MR
- AR slopes downward
Show answer
P = AR = MR. A price taker sells every unit at the market price, so each unit adds exactly P to revenue.
Marginal revenue is negative. Demand at this point is
- price inelastic
- price elastic
- unitary elastic
- perfectly elastic
Show answer
price inelastic. MR < 0 means a price cut reduces TR, which happens when demand is inelastic.
A firm's demand curve is P = 50 - Q. Its MR curve is
- MR = 50 - Q
- MR = 25 - Q
- MR = 50 - 2Q
- MR = 100 - 2Q
Show answer
MR = 50 - 2Q. For linear demand, MR has the same intercept and twice the slope.

Practise with instant feedback

Sources

Last updated 8 November 2026. Spotted a mistake? Tell us.