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Definition of Total Revenue:
equals the number of items of a good or service sold multiplied by the price of the good or service. It is also referred to as the total sales.
If ten hot dogs are sold at $4.00 each, the total revenue would equal $40 (10 x $4.00). An accounting profit equals total revenues less total expenses. To maximize profits, businesses strive to maximize the difference between their total revenues and total costs. Understanding the subtleties of the relationship between revenues and costs distinguishes the best business managers. Increasing production leads to an increase in sales and total revenue, but there is a cost to increasing production. Marketing focuses on increasing a company's total revenue, but there is a cost to market a good or service. Will adding additional sales people or investing in advertising generate a sufficient increase in revenue to warrant the investment? Pricing decisions also affect total revenue. Managers know that they can increase the quantity of items they sell by lowering their price. Total revenues would increase if the demand for the good or service is elastic. But the production costs of producing the additional goods may be prohibitive. They also know that fewer items will be sold if they increase their price. However, if the good or service has an inelastic demand curve, revenues would actually increase.
Dig Deeper With These Free Lessons:
Price Elasticity of Demand - How Much of a Price Change Would You Tolerate
Supply and Demand - Consumers and Producers Reach Agreement
Fundamental Economic Assumptions
Marginal Analysis - How Decisions Are Made
Output and Profit Maximization