Total Revenue Functions
Total revenue is the amount of revenue earned by a firm given a certain level of output of goods and services. It is often combined with a cost function to obtain a profit function. The nature of total revenue depends on the type of firm and whether it exhibits perfect competition, monopoly, oligopoly or monopolistic competition.
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Total Revenue
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Total revenue may be defined as the aggregate amount of revenue received by a firm for the output it sells. This does not include costs, as revenue minus costs produces a profit function. Instead, a total revenue function is used by a firm to calculate its profit function given known costs. The behavior of a total revenue function is often depicted by a total revenue curve, which is graphed with quantity produced on the x-axis and total revenue on the y-axis.
Perfect Competition
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Perfect competition is a type of market structure in which there are many similar small firms that sell the same goods and services. Because of the large number of firms, price is competitive, and this induces each individual firm to take a price as given instead of setting its own price. Firms in perfect competition thus have no market control. Because of this, total revenue is directly a result of the quantity of goods sold. If a product costs $1, and a firm sells one good, total revenue is $1. Similarly, if the firm sells 10 items of the good, total revenue is $10. As a result, total revenue appears as a straight line with a 45 degree angle originating at the axis.
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Monopoly, Oligopoly and Monopolistic Competition
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Any firm that does not exhibit the market behavior of market competition may be in either a monopoly or oligopoly or monopolistically competitive. In such scenarios, there are one or few firms that exercise a certain degree of market control, as there is less competition for customers and, therefore, for price. As a result, price is not static but depends on the quantity of goods and services sold. As quantity increases, price per good must decrease to sell the good. This is because market demand in such circumstances is downward-sloping. As a result, the total revenue curve increases in the same manner as perfect competition as first, but begins to level off with increasing levels of quantity.
Implications
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Total revenue is a concept used by firms to determine their policies regarding short-run production. Total revenue can also be used to calculate marginal revenue, which is the total amount of additional revenue resulting from an additional quantity sold. Marginal revenue can be determined using calculus. Specifically, a marginal revenue curve may be obtained by differentiating a total revenue function.
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