Why P=Ar=Mr? Proved
Answers
Explanation:
Simply put, under perfect competition MR = AR because all goods are sold at a single (i.e. same price) price in the market. ... Clearly with sale of every additional unit of the product, additional revenue (i.e. MR) and average revenue (AR) will become equal to Price. Hence both AR and MR will be equal to each other.
Disclaimer:
The image is created by me in Excel. It's not a screenshot from another website or from a book.
Price = AR
This is true for all markets. This is because
TR = Price*Q
And,
AR = TR/Q
or Q = TR/AR
Substituting the value of Q, we get
TR = Price*TR/AR
TR/TR = Price/AR
Price/AR = 1
Therefore, Price = AR
Price = AR = MR
We know that Price = AR in any case but AR = MR is true only in case of perfect competition.
Perfect competition is a situation where there is a large number of sellers, selling homogeneous product and also, there are a large number of buyers.
In perfect competition, prices are determined by market forces of demand and supply. A firm under perfect competition is a price taker, not a price maker. Price decision of an indivisual firm doesn't affect market price.
Since prices remain fixed in perfect competiton and prices don't fall with increase in output, MR remains constant, which means TR rises at a constant rate because TR is summation of MR.
Since TR is rising at a constant rate and output is also rising by a constant rate, ie 1 at a time, AR becomes equl to MR in perfect competition.
The following schedule and diagram illustrate this. (refer attachment)
