Question

Explain the difference between marginal revenue, average revenue, and price in perfect competition

Answer 1

Marginal Revenue, Average Revenue, and Price in Perfect Competition:

In a perfectly competitive market, there are distinct differences between marginal revenue (MR), average revenue (AR), and price:

Price:

• Definition: The price is the amount of money a customer pays for one unit of a good or service.
• Constant: In perfect competition, the price is set by the market and is constant for all firms, regardless of the amount they produce.
• Independent Variable: Price acts as an independent variable for a perfectly competitive firm, meaning they cannot influence it and must accept it as given.

Average Revenue:

• Definition: Average revenue is the total revenue earned per unit of output.
• Calculation: AR = Total Revenue / Quantity
• Relationship to Price: In perfect competition, the average revenue for a firm is always equal to the price. This is because the firm cannot influence the price and sells all units at the same price.
• Dependent Variable: Like price, average revenue is also a dependent variable for the firm, determined by the market price and quantity produced.

Marginal Revenue:

1. Definition: Marginal revenue is the additional revenue earned from selling one more unit of output.
2. Calculation: MR = Change in Total Revenue / Change in Quantity
3. Relationship to Price: In perfect competition, the marginal revenue for a firm is also equal to the price. This is because the firm can sell any additional unit at the market price.
4. Dependent Variable: Marginal revenue is a dependent variable, influenced by the firm's quantity and the market price.

Here's a table summarizing the key differences: