What is the difference between Average Revenue and Marginal Revenue?

Total Revenue-may be defined as the total receipts of (Hi firm from its sale. Total revenue is equal to total number of commodities multiplied by price per unit of commodity. Total reveue depends on the total sale. For example if a firm sells 60 of commodities at unit price Rs.20, the total revenue of the will be equal to 60 X Rs.20 - Rs.1200.

Average Revenue is the revenue per unit of the commodity it is calculated by dividing total Revenue by the number of old to the customers. For example if the total amount of 60 units of shirts is Rs.3000, the average revenue per unit list.3000 -r 60 = Rs.50.

Thus Rs.50 is the Average revenue unit sold. Here the average revenue and price per unit are equal. It should be noted that if a seller sells various units at the price, average revenue would be the same as price per unit commodity. But when different units are sold at different prices, then the Average revenue will not be equal to price.

For example if a seller sells two units of commodities at two different prices such as Rs. 12 and Rs.8, the total revenue from the sale of two units will be Rs. 20. Average Revenue will be equal to Rs.20/2 = Rs.10. Therefore, it is seen that if various units are sold at different prices, average revenue is not equal to the prices of the concerned product.

But what is seen in real life is that different units of a product are sold at the same price. In such a case price = AR. That is why in economics Average revenue is synonymous to price. The AR curve is also the same thing as the demand curve.

Marginal Revenue:

Marginal revenue at any level of firm's output is the net revenue added to the total revenue by selling an additional unit of the product. In other words Marginal Revenue is the addition to total revenue earned by selling n units of product instead of (n-1) units. For example if a seller sells 10 units of a product at Rs.130 and if he sells by one unit more i.e. 11 units, he gets Rs. 132 as total revenue. Thus MR is Rs. 132- Rs. 130 = Rs.2. MR = TRn TR (n l). Thus the marginal revenue (MR) = the difference between the total revenue of 'n' units sold and the total revenue of (n-1) units.

Average revenue for first 10 units of commodity sold = Rs.130 -r 10 = Rs.13 Average revenue for 2nd 11 units of Commodity sold = Rs. 132 + 11 = Rs.12 It is found that when total output is increased by one, the average revenue (price) falls to Rs.11. Thus the total loss of revenue from 10 units is Rs. 10. Thus the net addition made to the total revenue by the 11th unit, the previous loss of Rs.10 should be deducted from price of Rs. 12 at which eleventh unit is sold. The marginal revenue in such a case is Rs. 12-10 Rs, 2.

Thus Marginal revenue can be stated by subtracting the loss in revenue on previous units due to the fall in price from the price at which the additional unit is sold. Thus marginal revenue is the ratio of change in total revenue to the change in total output.

Marginal and Marginal Revenue curves under perfect competition:

Under perfect competition the unit Price per commodity is uniform throughout the market. The price of commodity is same at level of sale. When AR is same, its corresponding MR will be equal to it. If price is uniform and never falls, the addition made to the total revenue by that unit will be equal to the price at which it which it is sold. The relation between AR and MR curve is shown in the following table.

In the above table price or AR remains constant at Rs. 10. Total Revenue is the price multiplied by the total output. The difference between the previous and present total revenue is the marginal revenue which is also equal to Average Revenue.

Thus in the above table marginal revenue which is equal to Average revenue is Rs. 10 at all level of output. Thus in perfect competition average revenue are marginal revenue remains the same at all levels of Output. Thus under perfect competition AR = MR. The AR and MR curves are shown in the diagram given below. in the above diagram the MR curve merges with AR curve. Thus AR = MR curve under perfect competition is a horizontal straight line. In other words the demand for a firm's product under perfect competition is perfectly elastic.