The relation between Average revenue and Marginal revenue under perfect competition

Average revenue is the revenue per unit of output sold. Average revenue can be calculated by dividing the total revenue by number of units sold.

Thus Average revenue is also similar to price at which units are sold. Average revenue will called price only when the different units are sold at a uniform price. In such case Average revenue remains the same at all levels of output sold. But if the price changed on different units sold is different, then the price per unit will not be equal to its average revenue. However, in real market situation commodities are sold at the same price. Average revenue curve of the firm is also called the demand curves of the consumers.

Marginal revenue is the net addition to the total revenue by selling one more unit of commodity. It is the revenue of an additional unit sold. Stated algebraically stated, marginal cost is the addition made to total revenue by selling n units of a product instead of (n -1) where n is the given number.

Thus suppose a firm earns total revenue of Rs 300 by selling 10 units of the commodity. If the firm increases its sale by one unit or sells 11 units and earns Rs 349, then Rs 19 constitutes its marginal revenue because it represents the addition to the total revenue due to the sale of the 11th unit.

Marginal revenue can also be defined otherwise. For example the average revenue for 10 numbers of outputs is Rs 30 and when 11th unit is produced Average revenue fall to Rs 29. Thus the total loss for 10 units of output is Rs 10. Thus in order to find the net addition to the total revenue by 11th unit, the loss of revenue is (Rs 10) on previous units should be deducted from the price of Rs 29 at which the 11th unit is sold. Thus MR here is equal to Rs 29 - Rs 10 = Rs 19. Marginal revenue in such a case is less than the price at which the additional unit is sold.

MR = Price of the additional unit sold - the loss of revenue on previous units.

Therefore, it is concluded that when price (AR) falls marginal revenue becomes less than the price. When marginal revenue falls marginal revenue is less than the average revenue. When average revenue remains the same marginal revenue is equal to average revenue. Marginal revenue is the ratio of change in total revenue to change in total revenue to change in output. Thus symbolically

The relation between Average revenue and marginal revenue under imperfect competition:

Under all firms of imperfect competition i.e. monopolistic competition, oligopoly and monopoly, average revenue curve facing in individual firm slopes downward. In imperfect competition a firm Increase its sale by reducing price or decreases sale by increasing price.

Supposing the total revenue of selling 10 units of commodity is 120. Thus average revenue per unit will be Rs 12. If total revenue is 220 by selling 20 units of commodity, the average revenue becomes Rs 11. Thus average revenue falls with increase in the units of commodity sold. The relationship between average revenue marginal revenue and total revenue is shown in the following table.

In the above table average revenue falls when additional units of the good sold increases. Under imperfect competition a firm can sale more only by reducing price. The total out put is sold by the seller but bought by the buyers. This means when average revenue (or price) falls units of out a rises and when average revenue (price) raises quantity sold falls. This implies that average revenue curve under imperfect competition falls. The average revenue curve is thus the something as the demand curve at different price-quantity situations.

In the above diagram AR and MR curves are both falling downward but MR lies below it. MR Curve lies below AR curve because Marginal revenue declines more rapidly than average revenues. When OQ; units of goods are sold marginal revenue is zero. I.e. MR curve cuts OX-axis at point Q. If units sold increases beyond OQ, marginal revenue will become negative.