Defining Total, Average & Marginal Revenue
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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
Revenue in perfect competition
The Relationship Between TR, AR & MR in Perfect Competition
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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
Diagram: The Relationship Between Average Revenue & Marginal Revenue
An illustration of the relationship between AR, MR & TR in a perfectly competitive market
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
Revenue in imperfect competition
The Relationship Between TR, AR & MR for Imperfect Competition
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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
Diagram: Average Revenue & Marginal Revenue in Imperfect Competition
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 and 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
- From the point where MR = 0, the total revenue begins to fall