Total Revenue: The Big Picture of Sales Income
1. The Basic Formula: Price × Quantity
The simplest way to think about total revenue is like this: if you are selling lemonade, and you sell 10 cups for $2 each, your total revenue is $20. That's it! The basic formula is:
In MathJax: $TR = P \times Q$ or $TR = P \cdot Q$
This is the top line of a company's income statement. It doesn't tell us about profit (which subtracts costs), but it shows the total cash flowing in from sales. For a lemonade stand, if you raise the price to $3 per cup but only sell 5 cups, your total revenue becomes $15. Sometimes, a higher price can actually lower your total revenue if you sell many fewer cups.
2. How Price Changes Affect Total Revenue
The relationship between price and total revenue is not always straightforward. It depends on how sensitive customers are to a price change. This sensitivity is called elasticity of demand[1]. Let's see how total revenue behaves in different situations.
| Scenario | Price Change | Quantity Change | Effect on Total Revenue | Example |
|---|---|---|---|---|
| Elastic Demand | Price goes UP | Quantity falls A LOT | Total Revenue DECREASES | Fancy video games: if price is too high, kids buy used games instead. |
| Elastic Demand | Price goes DOWN | Quantity rises A LOT | Total Revenue INCREASES | A sale on popular sneakers: many more people buy them. |
| Inelastic Demand[2] | Price goes UP | Quantity falls A LITTLE | Total Revenue INCREASES | Gasoline: people still need to fill their tanks even if prices rise. |
| Inelastic Demand | Price goes DOWN | Quantity rises A LITTLE | Total Revenue DECREASES | A discount on salt: people don't buy much more salt than they need. |
3. Real-World Application: The School Bake Sale
Imagine your class is organizing a bake sale to raise money for a field trip. You are selling homemade cookies. This is a perfect example to see total revenue in action. You have to decide on a price. Let's look at two different strategies:
- Strategy A (High Price): You set the price at $2.00 per cookie. You sell 30 cookies. Total Revenue = $2.00 × 30 = $60.00.
- Strategy B (Low Price): You set the price at $1.00 per cookie. Because they are cheaper, you sell 100 cookies. Total Revenue = $1.00 × 100 = $100.00.
In this case, the lower price leads to higher total revenue because the increase in the number of cookies sold (quantity) makes up for the lower price per cookie. Your goal as a business is to find the price that maximizes total revenue, which isn't always the highest or the lowest price.
Important Questions
No, they are different. Total revenue is all the money from sales. Profit is what remains after you subtract all costs (like ingredients for lemonade, rent for a store, or employee salaries). So, Profit = Total Revenue — Total Cost.
Not necessarily. If they have to lower the price significantly to sell those extra products, the total revenue could actually go down. For example, if you lower the price of lemonade from $1.00 to $0.50 and only sell one more cup, you might make less money overall. It's all about the balance between price and quantity.
Total revenue is like a report card for a company's size and market popularity. A growing total revenue usually means more people are buying their products. It's the starting point for all other financial calculations and is a key sign of a company's health and ability to grow.
Footnote
[1] Elasticity of Demand: A measure of how much the quantity demanded of a good responds to a change in its price. If it's elastic, demand changes a lot when price changes. If it's inelastic, demand changes very little.
[2] Inelastic Demand: Describes a situation where the quantity demanded by consumers does not change much with a change in price. Necessities like basic food or medicine often have inelastic demand.