Question

Describe Total Revenue, Average Revenue and Marginal Revenue.

Hint:

TR=P*Q; AR=TR/Q=Price; MR=change in TR. AR=MR under perfect competition; MR<AR otherwise.

Answer 1

Step 1: Total Revenue (TR):
Total Revenue is the entire sale proceeds a firm receives from selling a given quantity of output: $TR = Price \times Quantity\ sold = P \times Q$.

Step 2: Average Revenue (AR):
Average Revenue is revenue earned per unit sold: $AR = \dfrac{TR}{Q} = \dfrac{P \times Q}{Q} = P$. This is why AR always equals price, and the AR curve is identical to the firm's demand curve.

Step 3: Marginal Revenue (MR):
Marginal Revenue is the additional revenue earned from selling one more unit of output: $MR_n = TR_n - TR_{n-1}$, or in continuous terms $MR = \dfrac{d(TR)}{dQ}$.

Step 4: Relationship between them:
Under perfect competition, price is fixed for the firm, so AR = MR = Price (a horizontal line). Under imperfect competition (e.g. monopoly), the firm must lower price to sell more, so both AR and MR slope downward, and MR lies below AR (MR falls twice as fast as AR for a straight-line demand curve), because selling an extra unit both adds revenue from that unit AND lowers the price received on all previous units.

Final Answer:
TR = P×Q (total sales proceeds); AR = TR/Q = Price (revenue per unit); MR = change in TR per additional unit sold — AR=MR under perfect competition, but MR < AR under imperfect competition.