Revenue and Perfect Competition

Total revenue (TR) formula

• Selling price (P) * Total output (TQ)

• Average revenue (AR) * Total output (TQ)

Average revenue (AR) formula

• Selling price (P)

• Total revenue (TR) / Total output (TQ)

Marginal revenue (MR) formula

Change in total revenue (∆TR) / Change in total output (∆TQ)

Define perfect competition

1. Infinite buyers and sellers

2. Homogenous goods

3. Price-taking firms

4. No barriers to entry/exit

5. Perfect information

Analyse why AR and MR are equal in perfect competition

• Because AR=P

• Because firms are price takers, they sell at the same price, suggesting the additional revenue from selling one extra unit is equal to the price, suggesting MR=P

• Furthermore, AR=MR

Describe the demand (D=AR=MR) curve in perfect competition

Perfectly horizonal because firms are price takers, suggesting they sell at the same price regardless of total output

Describe the total revenue (TR) curve in perfect competition

Upward sloping because TQ increases, suggesting TR increases