Average Revenue Formula

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What is Average Revenue?

The average revenue can be defined as a measurement of revenue that is generated per unit. The Average Revenue Per Unit, also known as ARPU, is the average revenue for each user. This is the non-GAAP measure that enables the management of the company and helps the investors refine their analysis with respect to the revenue generation capability of the company and the rate of growth is also traced at each unit level. This is generally calculated as total revenue, which is divided by the number of units, number of subscribers, or number of users.

 

The Formula for Average Revenue

The average revenue formula is simple. This is essentially the revenue that is earned for each unit of the output. In other words, it’s the price of 1 unit of output. The expression for the average revenue is as follows:

\[AR = \frac{TR}{Q} \] 

where AR = Average Revenue, TR = Total Revenue, and Q = Quantity of commodity sold.

For instance, if the firm sells about 1000 units of the commodity, and has a total revenue of INR 10,000. Hence the average revenue is calculated as \[AR = \frac{10,000}{1000}\] = Rs.10. 

Hence the firm or the organisation sells this commodity at Rs. 10 per unit price. 


Uses of the Average Revenue Per Unit

The measure of ARPU is incorporated in the telecommunication sector by AT&T, Verizon, and others. For tracking the revenue amount which is generated for each mobile phone user of a specific sector, over the period of time. In the mobile industry, the calculation for ARPU is done using revenue billed to customers each month for the user subscriptions plus the revenue that is generated from the incoming calls that are liable to be paid under the regulatory interconnection system. The measurement values can be used internally and externally for comparison and in assisting the forecast of future services revenue which is produced from the customer base. 


The Curve of Average Revenue

The curve provides the graphic representation of the relationship between the average revenue of a firm for selling output and the quantity of the output sold by a specific firm. Since the average revenue is basically the price of the goods. The average revenue curve is deemed as the demand curve for the output of a particular firm. 

The average revenue curve for the firm that has no market control, is the horizontal line. The average revenue curve for the firm that has market control, is negatively sloped. The curve of average revenue reflects the degree of market control that is controlled by the firm.


More About Average Revenue Formula

Average revenue is defined as the measurement of the revenue that is generated per unit. ARPU abbreviated as Average Revenue Per Unit is also known as the average revenue per user. This is a non- GAAP measure that allows the management of a company, helps the investors to refine their analysis with a company's revenue generation capability and the growth rate is also traced at the per-unit level. This is usually calculated as the total revenue that is divided by the number of units, number of users, or number of subscribers.


Average Revenue Per Unit (ARPU)

The average revenue per unit is equal to the total revenue which is divided by average units or the users in a particular period. The period’s ending date is not the measure of the date for the denominator as the number of units is vulnerable to fluctuation in the intra-period. Instead of this, the beginning of the period and the end time of the period numbers are generally averaged.

Well, the number of units or the users will not remain constant throughout the time period. This can vary somewhat from daily, as new users appear or the old users cease to take the advantage of the goods and services. Therefore, the number of units which is for a given period is estimated, for this will give the most accurate ARPU figure possible required for that period.


Uses of Average Revenue Per Unit 

This measure of ARPU is used in the telecommunications sector by Verizon, AT & T, and others. In order to track the amount of the revenue which is generated per mobile phone user of that particular sector over a period of time. In the mobile telephone industry, ARPU is calculated not only by using the revenue billed to the customer each month for user subscriptions, but also by the revenue generated from any incoming calls that are payable under the regulatory interconnection system.

Cable companies like Comcast also disclose the ARPU figures. The values of the measures that are obtained can be used internally as well as externally as a comparison from among the subscriber-based companies and to assist in the forecasting of their future service revenues that are produced from a customer base.


Average Revenue Curve

A curve that graphically represents the relation between the average revenue that is received by a firm for selling the output and the quantity of output sold by the specific firm. As average revenue is quite essentially the price of a good, the average revenue curve is also deemed as the demand curve for a particular firm's output. The average revenue curve for a firm with no market control is a horizontal line. While the average revenue curve for a firm with market control is negatively sloped.

The curve represents the relation between the average revenue a firm receives from production and the quantity of the output which is produced. The average revenue curve reflects the degree of market control which is controlled by the firm.

For a perfectly competitive firm with no market control, the average revenue curve is only a horizontal line. For those firms with good market control, especially the monopolies, the average revenue curve is a negatively-sloped curve.


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Average Revenue Curve in a Perfectly Competitive Firm

The average revenue curve of the perfectly competitive firm is a horizontal line as it faces a perfectly elastic demand at the market which has determined its price. This is for the condition as there is a significant number of buyers and sellers trading in the market alongside with perfect information meaning that if a firm somehow wants to raise its price, the customers in the market would move to a different producer and purchase the good at their original price and the firm who raised their price would receive 0 revenue. Marginal revenue is horizontal because the increase in the revenue from producing one unit of output is equal to the price of goods, meaning that it remains constant, thus the curve is horizontal.

FAQs (Frequently Asked Questions)

1. What do you mean by revenue?

The revenue is the income that is generated from the daily business operations, and this includes the deductions and discounts for returned merchandise. This is the gross income figure or top line on which the costs are subtracted for determining the net income. The revenue is quite essential for the startup to get positive revenue in the early period of time. Revenue is the income, which is generated by the organisation as a part of its daily business activities. 

2. What is the demand curve?

In economics, the demand curve is the graphic representation of the relationship which is present between the quantity of product that is demanded and the product price. This curve is drawn with the price plotted on the vertical axis and the quantity demanded plotted on the horizontal axis of the graph. The curve determines the quantity of the particular commodity that customers are willing to buy with the corresponding changes in the price. This is the broad explanation of the demand curve.

3. What is the meaning of a perfectly competitive firm?

A perfectly competitive firm is generally the price taker, and it means that the firm should accept the equilibrium price of the goods sold by the firm to the locals. A perfect competition happens when you have a good number of sellers plus there is easy entry and exit for these firms. The products are identical to one another and the sellers are known as the price takers. 

4. How do I study from the Vedantu notes on the “Average revenue formula”?

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6. Explain Revenue.

Revenue is the type of income that is generated from normal business operations and this includes discounts and other deductions for the returned merchandise. This is the top line or gross income figure on which costs are subtracted to determine the net income. Revenue is quite vital for a start-up to get positive revenue quite in an early time period.

Revenue is the income that is generated by an organisation while receiving from its normal business activities. In the case of a corporation, they are usually from the sale of goods and services to the customers. In the case of a government, the revenue generally comes from taxes.

7. What is a Perfectly Competitive Firm?

A perfectly competitive firm is generally a price taker, this means that the firm must accept the equilibrium price at which the firm sells goods to the locals. Perfect competition occurs when there is a number of sellers, and there is easy entry as well as an exit for the firms, the products are identical from one another, and the sellers are called the price takers.

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