Marginal, average and total revenue Flashcards
What is the difference between marginal, average, and total revenue?
Total Revenue (TR): The total income from sales, calculated as price per unit multiplied by quantity sold
Average Revenue (AR): The revenue per unit of output, calculated as total revenue divided by quantity sold. In perfect competition, AR equals the price per unit
Marginal Revenue (MR): The additional revenue from selling one more unit, calculated as the change in total revenue divided by the change in quantity sold
Example: If a firm sells 100 units at £10 each, its TR is £1,000, AR is £10, and MR is the additional revenue from selling one more unit.
Why is the average revenue curve the firm’s demand curve in a monopoly?
In a monopoly, the average revenue (AR) curve is identical to the firm’s demand curve because the monopolist is the sole supplier in the market. This means that the price at which the monopolist can sell its product is determined by the market demand for that product. Unlike firms in perfect competition, which are price takers, a monopolist has the power to set the price based on the quantity it wishes to sell, as it faces the entire market demand curve
What is the relationship between average and marginal revenue?
Perfect Competition: In perfect competition, average revenue equals marginal revenue, both equal to the price per unit
Monopoly and Imperfect Competition: In imperfect competition, marginal revenue is less than average revenue because the firm must lower the price to sell additional units, affecting the revenue from all units sold.
Example: In perfect competition, if the price is £10, both AR and MR are £10. In a monopoly, to sell an additional unit, the firm may need to lower the price, so MR is less than AR.
What is the relationship between marginal revenue and total revenue?
Marginal revenue is the rate of change of total revenue with respect to quantity. If marginal revenue is positive, total revenue increases as quantity increases. If marginal revenue is negative, total revenue decreases as quantity increases.
Example: If selling an additional unit increases total revenue, MR is positive. If it decreases total revenue, MR is negative.
