Relationship between MR and AR under Perfect competition.
Under Perfect Competition the relationship between marginal revenue (MR) and average revenue (AR) can be studied as under-
Under perfect competition price of commodity remain constant therefore average revenue also remain constant as it is always equal to price.
AR =P…………….. (1)
Since price is constant therefore revenue received by selling an additional unit of commodity i.e. marginal revenue will also equal to price which is constant or same.
MR = P…………….. (2)
From equation 1 and 2
AR =P=MR
AR =MR
Thus under perfect competition marginal revenue and average revenue are equal and constant. Therefore AR-MR curve is parallel to X-axis.
We can explain it with the help of a schedule and diagram:
| Units of commodity sold Price (P) (Rs) | Price (P) (Rs) | Total Revenue TR=P×Q (Rs) | Marginal Revenue MR=TRn - TRn-1 | Average RevenueAR =TR/Q(Rs) |
| 1 | 10 | 10 | 10 | 10 |
| 2 | 10 | 20 | 10 | 10 |
| 3 | 10 | 30 | 10 | 10 |
| 4 | 10 | 40 | 10 | 10 |
In above diagram AR/MR line shows average revenue –marginal revenue curve.
