Revenue means the money income which the manager is
getting from the sale of total output in the market.
Revenue Function is an important contribution in the
study of the producer’s behavior.
Revenue function is given by,
R = f (y)
where,
R = total revenue of the firm (dependent variable)
Y = total output of the firm (independent variable)
and both these variables are positively related.
Therefore, it is observed that in order to generate
more revenue, the firm has to increase the level of output which is being sold
in the market at the existing market price. This is the significance of revenue
function in managerial economics.
Revenue function has 3 components:
1.
Total
revenue of the firm
2.
Marginal
revenue of the firm
3.
Average
revenue of the firm
Nature and Behavior of different revenue derived from
revenue analysis:
1.
Total
revenue of the firm
Total revenue is the aggregate money income which the manager
is getting by selling total product in the market. It is observed that if
output is zero total revenue of the firm is also zero. However with the increase
in output of the firm, total revenue parameter goes on increasing.
2.
Marginal
revenue of the firm
Marginal revenue is the additional money income which
the manager is getting by selling one more additional unit of the product in
the market. Marginal revenue is the rate at which the total revenue of the firm
goes on increasing with the increase in output of the firm.
Marginal revenue parameter behaves differently in
different market situations:
(i)
Perfect
Competition
Under perfect competition market we observe the
existence of identical product and identical price. Therefore, in
this market structure total revenue of the firm increases at a constant
rate. Therefore, we observe that marginal revenue under perfect competition market
becomes identical.
(ii)
Imperfect
Competition
Under imperfect competition market we do not get
existence of identical product and identical price. Therefore, under imperfect competition
market we observe that total revenue of the firm increases but at a diminishing
rate.
3.
Average
revenue of the firm
Average is known as the per unit revenue of the
firm.
Average Revenue
= (total revenue of the firm) / (total output of the firm)
This revenue parameter also behaves differently under
different market situations.
(i)
Perfect
Competition
Under perfect competition market we observe the
existence of identical product and identical price. Therefore, in
this market structure per unit revenue of the firm is always identical.
(ii)
Imperfect
Competition
Under imperfect competition it is observed that there
is non existence of identical product and identical price. Therefore,
in this market structure per unit revenue of the firm declines at
a slow rate with the increase in the output of the firm.