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Average Revenue and Marginal Revenue under Perfect Competition

Here, we understand about what is average revenue and marginal revenue under perfect competition with example in detail.

Average Revenue and Marginal Revenue under Perfect Competition
First, we understand the meaning of Average Revenue and Marginal Revenue.
Average Revenue:
Average revenue refers to revenue per unit of output sold. AR = TR / Q.
Where,
AR = Average Revenue
TR = Total Revenue
Q = Total output sold.
Average revenue is equal to price.
Marginal Revenue:
Marginal revenue refers to change in total revenue when output and sales volume is changed by one unit. It is addition to total revenue when output is increased by one unit.
Now, we will discuss about Average revenue and Marginal revenue under perfect competition in detail-
As we know that Perfect competition is a market situation in which each seller is so small relative to the entire industry that he cannot affect market price by changing his output. He has no control over market price. He must accept the price that currently prevails in the market. He can reduce price, but this is neither necessary nor desirable. At current market price, he can only sell as much as he wishes.
Figure-
The market equilibrium as shown in figure-1 is in a perfectly competitive industry. Market demand is indicated by D and market supply by S. Both intersection decides market equilibrium price OP and equilibrium quantity OQ. Here, the demand curve faced by an individual producer of firm in this industry as shown in figure-2 as a horizontal line at the level of market equilibrium price. It is noted as D = AR = MR. The horizontal line at the level of market equilibrium price. It clearly indicates that he can sell nothing at a price higher than OP and can sell any amount at OP price. It is the average revenue curve.
A producer under perfect competition can sell additional units the product without reducing price, his total revenue increases by the same amount as price.
It means, when price seems constant, marginal revenue is equal to price or average revenue as no loss is incurred on previous units in this case. Figure-2 shows, the horizontal demand curve facing a producer is noted as MR also. 
Now, we understand this with the help of table mentioned below as follows-
Table-
It follows from the above table that-
  1. Since price is constant, marginal revenue equals price or average revenue. i.e. Price = AR = MR. They are identical.
  2. Since price is constant, marginal revenue is also constant. Indicated by the same horizontal line.
  3. Total revenue increases at a constant rate as additional units are produced and sold.
Average Revenue and Marginal Revenue under Perfect Competition
What is Average revenue?
What is Marginal revenue?
Perfect Competition
Perfect Competition - Average Revenue and Marginal Revenue under Perfect Competition.
Kinnari
Tech writer at NewsandStory
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