Firms get income, or revenue, by selling their product to buyers. To make good decisions, firms must know how their revenue changes when they produce and sell different quantities of output. Total revenue, average revenue, and marginal revenue are all terms that represent how much revenue a firm gets at different quantities of output sold. Total revenue is the amount of revenue a firm receives at different quantities. P Q , where P represents the price of the product, and Q is the quantity sold.
Average revenue is revenue per unit of output.
Average revenue is the same as demand. Marginal revenue is the additional revenue gained by selling one more unit of the product. We know from our study of demand that people usually respond to price changes by changing the quantity they buy. Most people respond more to changes in the price of jeans than to changes in the price of required textbooks. Elasticity gives us a way to measure how much people respond to price changes.