Total, Average & Marginal Revenue
-
Total revenue is the total value of all sales a firm incurs
- Average revenue is the overall revenue per unit
- Marginal revenue is the extra revenue received from the sale of an additional unit of output
- The relationship between TR, AR & MR is different in perfect competition and imperfect competition
Perfect Competition
The Relationship Between TR, AR & MR In Perfect Competition Can Be Seen Numerically Below
P (£) |
Q |
TR |
AR |
MR |
8 | 5 | 40 | 8 | 8 |
8 | 6 | 48 | 8 | 8 |
8 | 7 | 56 | 8 | 8 |
8 | 8 | 64 | 8 | 8 |
- The situation in the table above is illustrated in the diagram below
An illustration of the relationship between AR, MR & TR
Observations
- The firm is a price taker at P1 (£8)
- Every unit of output is sold at the same price
- A higher price would decrease sales to zero
- A lower price would result in all sellers lowering their price
- TR increases at a constant rate
- MR = AR = Demand
Imperfect Competition
The Relationship Between TR, AR & MR For Imperfect Competition Can Be Seen Numerically Below
P (£) |
Q |
TR |
AR |
MR |
8 | 1 | 8 | 8 | 8 |
7 | 2 | 14 | 7 | 6 |
6 | 3 | 18 | 6 | 4 |
5 | 4 | 20 | 5 | 2 |
4 | 5 | 20 | 4 | 0 |
3 | 6 | 18 | 3 | -2 |
2 | 7 | 14 | 2 | -4 |
1 | 8 | 8 | 1 | -6 |
- The situation in the table above is illustrated in the diagram below
An illustration of the relationship between AR, MR & TR for imperfect competition
Observations
- The firm is a price maker
- In order to sell an additional unit of output, the price (AR) must be lowered
- Both AR & MR fall with additional units of sale
- When the AR falls, the MR falls by twice as much
- The gradient of the MR curve is twice as steep as the AR curve
- TR is maximised when MR = 0
- AR is the demand (D) curve
- When MR = 0, then the price elasticity of demand (PED) = 1
- This is unitary elasticity
- This is unitary elasticity