Total revenue, also known as gross revenue, is a crucial metric for businesses to understand their financial performance. It represents the total amount of money earned from selling products or services within a specific timeframe.
However, total revenue can be further examined by looking at its relationship with marginal revenue. Marginal revenue measures the change in revenue when an additional product or service is sold.
The connection between these two metrics is essential for companies to determine the profitability of their core revenue-generating activities. If the cost of producing an extra unit is lower than the marginal revenue generated, total revenue will increase. On the other hand, if the cost exceeds the marginal revenue, it may be more beneficial for the company to cease production.
The calculation of marginal revenue is simple: divide the change in total revenue by the change in the quantity of goods sold. For example, if a bakery sells birthday cakes for $15 each, with a material cost of $5 per cake, resulting in a $10 profit, and then receives a special order for a custom cake, sold at $20 with the same material cost, resulting in a $15 profit per cake, we can see an illustration of increasing marginal revenue.
In summary, total revenue is the total income generated by a business, while marginal revenue measures the change in revenue when selling additional products or services. Understanding the relationship between these two metrics is crucial for companies to make informed decisions about their financial performance and profitability.
