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Understanding MR Curve and AR Curve

Marginal Revenue (MR) Curve

  • Definition: The Marginal Revenue (MR) curve represents the change in total revenue from selling one additional unit of a product.

  • Graphical Representation:

    • The MR curve is typically downward sloping.

    • For a perfectly competitive market, the MR is constant and horizontal because the price remains the same irrespective of quantity sold.

    • In monopolistic or imperfectly competitive markets, the MR curve slopes downwards due to the need to lower prices to sell more units.

  • Key Features:

    • The MR curve intersects the price line (AR curve) at the level of output where price decreases influence revenue.

    • MR becomes negative when the firm reduces its price so much that total revenue declines despite selling more units.

Average Revenue (AR) Curve

  • Definition: The Average Revenue (AR) curve shows the revenue earned per unit sold, usually equated to the price in a given market.

  • Graphical Representation:

    • The AR curve can also be represented as a downward-sloping line in the case of a monopolistic market, indicating that a firm must lower its price to increase sales.

    • In perfect competition, the AR curve is horizontal since it equals the market price at any output level.

  • Key Features:

    • The AR curve is above the MR curve in a monopolistic setting.

    • The price at any quantity sold reflects the average revenue.

Relationship Between MR and AR Curves

  • Comparison:

    • In perfect competition: MR = AR (both are horizontal).

    • In monopolistic competition: MR < AR (the MR curve slopes downward faster than the AR curve).

  • Implication:

    • The distance between the AR curve and the MR curve indicates the amount of price reduction the firm must undertake to sell additional units.

Summary of Graphical Characteristics

  • Perfect Competition:

    • Both curves are horizontal at the price level, indicating price equality with MR and AR.

  • Monopolistic Competition:

    • Both curves are downward sloping, with MR below AR, showcasing the relationship where the reduction of price decreases MR significantly compared to AR.