Total, average and marginal revenue

Total, Average & Marginal Revenue

The Relationship Between TR, AR and MR In Perfect Competition Can Be Seen Numerically Below

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

  • Demand for the firm's product is therefore perfectly price elastic

• TR increases at a constant rate

• MR = AR = Demand

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

PED & Total Revenue

• The total revenue rule states that in order to maximise revenue, firms should increase the price of products that are inelastic in demand and decrease prices on products that are elastic in demand 

• This can be illustrated using an average revenue (AR) curve which is the demand curve

Observations

• When a good/service is price elastic in demand, there is a greater proportional increase in the quantity demanded to a decrease in price

• TR is higher once the price has been decreased