Behaviour of Revenue

We distinguish between two types of market situation in this situation

1) Perfectly competitive market

2) Imperfectly competitive market

The behaviour of Toal revenue, Average revenue and Marginal revenue will be different in the two types of market.

Relationship between TR, AR and MR under Perfect Competition

A firm under perfect competition is able to sell additional units of output at the ruling price. It is not required to reduce the price to sell more.

Reason:

As perfect competition is a market structure where there are large number of firms, so increase or decrease in production by any one firm do not affect in total supply in the whole market and also on price.

The collective force of demand and supply determines price in perfect competition which prevails in the market.

So each firm sells at the prevailing price (so do not reduce the price to sell more).

So firms are price taker and their demand curve is perfectly elastic.

Tabular Relationship between TR, AR and MR under Perfect Competition

Units of output (Q)	Price  ( P)	AR (TR / Q)		TR (P x Q)	MR (TRn- TRn-1)
1 2 3 4 5	10 10 10 10 10	10 10 10 10 10	10 20 30 40 50		10 – 0 = 10 20 – 10 = 10 30 – 20 = 10 40 – 30 = 10 50 – 40 = 10

Graphical Relationship between TR, AR and MR under Perfect Competition

average revenue

total revenue

1) Since a firm under perfect competition is not required to reduce the price while selling more units of output, the average revenue is constant at all levels of output .

This is because AR is the same as price and price under perfect competition is constant.

We know that

AR = TR / Q

(TR = P x Q)

            = P x Q / Q

            = P

AR = P

As shown in the above table that AR is 10 at all levels of output.

Graphically, AR curve is horizontal straight line(parallel to X axis) at the level of ruling price OP.

2) In case price is constant ( implying AR is constant), then MR should also be constant (AR being equal to MR).

Since every additional unit is sold at the same price, it follows that firms MR resulting from an increase in sale by one unit is constant and equal to the price of the product.

From the above table it is clear that MR is Rs. 10 at all levels of output and is equal to the AR or price.

Graphically, AR and MR curves coincide at the levels of price OP, showing that AR = MR at all the levels of output.

Firms demand curve or price line is the same as firms AR curve, because AR means price, and demand curve (or AR curve) shows the relationship between price and quantity demanded of firms output.