Question

Relationship between average revenue and marginal revenue and elasticity of demand

Answer 1

There is a very useful relationship between elasticity of demand, average revenue and marginal revenue at any level of output. We will make use of this relation extensively when we come to the study of price determination under different market conditions. Let us study what this relation is.

We have stressed above that the average revenue curve of a firm is really the same thing as the demand curve of consumers for the firm’s product. Therefore, elasticity of demand at any point on a consumer’s demand curve-is the same thing as the elasticity of demand on the given point on the firm’s average rev­enue curve.


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