Price paid by the consumer for the product forms the revenue or income of the seller. The whole income received by the seller from selling a given amount of the product is called total revenue. If a seller sells 15 units of a product at price Rs. 10 per unit and obtains Rs. 150 from this sale, then his total revenue is Rs. 150.
Thus total revenue can be obtained from multiplying the quantity of output sold by the market price of the product (P.Q). On the other hand, average revenue is revenue earned per unit of output. Average revenue can be obtained by dividing the total revenue by the number of units sold. Thus,
Average revenue = total revenue/total output sold
AR = TR/Q
Where AR stands for average revenue, TR for total revenue and Q for total output produced and sold. In our above example, when total revenue Q equal to Rs. 150 is received from selling 15 units of the product, the average revenue will be equal to Rs. 150/15 = Rs. 10. Rs. 10 is here the revenue earned per unit of output.
Now the question is whether average revenue is different from price or these two concepts mean the same thing. If a seller sells various units of a product at the same price, then average revenue would be the same thing as price. But when he sells different units of a given product at different prices, then the average revenue will not be equal to price.
An example will clarify this point. Suppose a seller sells two units of a product, both at a price of Rs. 10 per unit. Total revenue of the seller will be Rs. 20 and the average revenue will be 20/2 = Rs. 10. Thus average revenue is here equal to the price of the product.
Now suppose that the seller sells the two units of his product, one unit to the consumer A at price Rs. 12 and one unit to the consumer B at price Rs. 10. His total revenue from the sale of two units of the product will be Rs. 22. Average will be here equal to 22/2 = Rs. 11. Thus in this case when two units of the product are sold at different prices, average revenue is not equal to the prices charged for the product.
But in the actual life we find that different units of a product are sold by the seller at the same price in the market (except when he discriminates and charges different prices for different units of the good), average revenue equals price. Thus in economics we use average revenue and price as synonyms except when we are discussing price discrimination by the seller.
Since the buyer’s demand curve represents graphically the quantities demanded or purchased by the buyers at various prices of the good, it also, therefore, shows the average revenue at which the various amounts of the good are sold by the seller. This is because the price paid by the buyer is revenue from seller’s point of view. Hence, average revenue curve of the firm is really the same thing as the demand curve of the consumers.