Question

Relationship between total revenue average revenue and marginal revenue under perfect competition

Answer 1

Under Pure Competition:

The average revenue curve is a horizontal straight line parallel to the A-axis and the marginal revenue curve coincides with it. This is because under pure (or perfect) competition the number of firms selling an identical product is very large.

The price is determined by the market forces of supply and demand so that only one price tends to prevail for the whole industry,It is OP as shown in panel (A) of Figure 1.

Each firm can sell as much as it wishes at the market price OP. Thus the demand for the firm’s product be­comes infinitely elastic. 

Since the demand curve is the firm’s average revenue curve, the shape of the AR curve is horizontal to the А-axis at price OP, as shown in panel (B) and the MR curve coincides with it. This is also shown in Table 1 where AR and MR remain constant at Rs 20 at every level of output. Any change in the demand and supply conditions will change the market price of the product, and consequently the horizontal AR curve of the firm.

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