Relationship Between AR and MR
Let us consider the relationship between marginal average and total revenue at previous levels of output more fully with the help of a table given below. This table represents a situation of a hypothetical finn. Price of 11th unit minus loss in revenue Oil units resulting from price reduction. Generally speaking, marginal revenue is less than price as indicated by the above formula. But in perfect competition. when a firm ean sell any amount at the ruling market price. marginal revenue is equal to average revenue or price since there is no loss incurred on the previous units.
In the above table. Column 2 shows the Average Revenue. while Column 4 shows the marginal revenue. Marginal revenue has been derived from the total revenue column of the table. Thus, in going from two to three uni the marginal revenue is 18 and this is found out by subtracting 42 from 60, and so on. The Table further indicates that when average revenue is falling. marginal revenue is less than average
Under Perfect Competition. When competition is perfect, as already seen, the average revenue curve of the firm is a horizontal straight line. This is so because an individual firm under perfect competition, by its own action, cannot influence the price. The seller under perfect competition can sell any amount of the commodity at the ruling market price. In this case,