CHAPTER - 8
CONCEPTS OF REVENUE
INTRODUCTION
The concept of production
costs is fundamental in economics and business. It refers to the expenses
incurred by a company in the process of transforming inputs, such as labor, raw
materials, and capital, into finished goods or services. Production costs play
a crucial role in determining the profitability, pricing decisions, and overall
efficiency of a business.
Costs of production can be
categorized into two main types: fixed costs and variable costs.
Fixed costs are expenses
that do not vary with the level of production. They are incurred regardless of
whether any units are produced or not. Examples of fixed costs include rent for
the production facility, salaries of permanent staff, insurance premiums, and
depreciation of machinery and equipment. Fixed costs are often considered as
sunk costs, meaning they are committed and cannot be easily adjusted in the
short run.
Variable costs, on the other
hand, are expenses that change in proportion to the level of production. They
increase or decrease based on the quantity of output produced. Examples of
variable costs include the cost of raw materials, direct labor wages, energy
costs, and packaging materials. Variable costs are directly tied to the
production volume, and as more units are produced, variable costs increase.
In addition to fixed and
variable costs, there are also semi-variable costs, which have both fixed and
variable components. These costs consist of a base cost that remains constant
and a variable component that changes with the level of production. Examples of
semi-variable costs include utility bills with a fixed base charge and a
variable charge based on usage, or salaries with a fixed base pay and a
commission or bonus based on performance.
Understanding the different
types of production costs is essential for businesses to analyze their cost
structure, determine pricing strategies, and make informed decisions about
resource allocation and cost control. By effectively managing and optimizing
these costs, companies can enhance their profitability and maintain a
competitive edge in the market.
MEANING OF REVENUE
Revenue refers to the total
income generated by a business or organization from its primary activities,
such as selling goods or services. It represents the inflow of money resulting
from the sale of products, provision of services, or other business operations.
Revenue is a crucial component in determining a company's financial performance
and is often used as a measure of its success.
Revenue can be derived
from various sources, including:
Sales
Revenue: This is the revenue
generated from the sale of goods or services to customers. It is the primary
source of revenue for most businesses and is typically recorded when a sale is
made and the customer pays for the product or service.
Service
Revenue: Some businesses,
especially those in the service industry, generate revenue by providing
services to clients. This can include professional services, consulting,
maintenance, or any other service offered by the company.
Rental
Revenue: Companies that own or
lease out property or assets can earn revenue through rental or lease payments.
This can include rental income from real estate properties, equipment,
vehicles, or any other assets that are leased to others.
Licensing
and Royalty Revenue: Businesses
that have intellectual property, such as patents, trademarks, or copyrights,
can earn revenue by licensing their rights to other companies in exchange for
royalty payments. This is common in industries like entertainment, software,
and publishing.
Advertising
and Sponsorship Revenue: Media
companies, online platforms, and events can generate revenue through
advertising and sponsorship agreements. Companies pay for advertising space or
sponsor events, and the revenue is earned by the entity providing the advertising
or hosting the event.
It's important to note that
revenue represents the total amount of money generated before deducting
expenses, taxes, and other costs. To determine the profitability of a business,
revenue must be compared to the corresponding costs and expenses to calculate
the net income or profit.
Revenue is a key financial
metric used in financial statements and reports, such as the income statement
or profit and loss statement. It provides insights into the top-line performance
of a company and is used by investors, stakeholders, and analysts to assess the
company's financial health, growth potential, and ability to generate profits.
CONCEPTS OF REVNUE
When it comes to
understanding revenue, there are a few key concepts that are important to grasp.
Let's explore these concepts:
Gross
Revenue: Gross revenue refers
to the total revenue generated by a company from its primary activities, such
as the sale of goods or services, before deducting any expenses or costs. It
represents the full amount of income generated by the company.
Net
Revenue: Net revenue, also
known as net sales or net income, is the revenue that remains after deducting
certain expenses, such as discounts, returns, and allowances, from the gross
revenue. Net revenue is a more accurate representation of the actual revenue
earned by the company.
Operating
Revenue: Operating revenue
refers specifically to the revenue generated from a company's core operating
activities. It excludes revenue from non-operating activities, such as
investment income or one-time gains. Operating revenue provides insight into
the performance of a company's primary business operations.
Other
Revenue: Other revenue
includes income that is not directly related to a company's primary operations.
This can include revenue from investments, rental income, royalties, or any
other sources of income that are not part of the core business activities.
Other revenue is often considered as non-operating revenue.
Recurring
Revenue: Recurring revenue is revenue
that a company can expect to receive on an ongoing basis. This type of revenue
typically comes from regular customers or ongoing contracts and provides
stability and predictability to a company's cash flow. Examples of recurring
revenue include subscription fees, maintenance contracts, or service
agreements.
Non-Recurring
Revenue: Non-recurring revenue, also
known as one-time or extraordinary revenue, refers to revenue that is not
expected to continue in the future. It may result from unique events, such as
the sale of assets, legal settlements, or other one-time transactions.
Non-recurring revenue is not considered part of the company's regular income
stream.
Understanding these concepts
of revenue is crucial for businesses to assess their financial performance,
make strategic decisions, and evaluate their growth potential. By analyzing
different components of revenue, companies can gain insights into their revenue
sources, profitability, and sustainability.
REFLATIONSHIP BETWEEN TOTAL REVENUE
(TR) AVERAGE REVENUE (AR) AND MARGINAL REVENUE (MR)
The relationship between
total revenue (TR), average revenue (AR), and marginal revenue (MR) is
important in understanding how changes in output or sales affect a company's
revenue. Let's explore the relationship between these three concepts:
Total
Revenue (TR): Total revenue is the
overall revenue generated from the sale of goods or services. It represents the
total inflow of money received by a company from its sales activities. TR is
calculated by multiplying the quantity of goods sold (Q) by the price per unit
(P): TR = Q * P.
Average
Revenue (AR): Average revenue is
the revenue earned per unit of output sold. It is calculated by dividing total
revenue (TR) by the quantity of goods sold (Q): AR = TR / Q. In a perfectly
competitive market, average revenue is equal to the price per unit of the
product, as each unit is sold at the same price.
Marginal
Revenue (MR): Marginal revenue
refers to the additional revenue earned by selling one additional unit of
output. It measures the change in total revenue resulting from a one-unit
increase in output. MR can be calculated by taking the difference between the
total revenue of two different levels of output: MR = TR2 - TR1.
The relationship between TR, AR, and MR can be summarized
as follows:
When average revenue (AR) is
equal to the marginal revenue (MR), it indicates that each additional unit sold
is generating the same amount of revenue as the average unit. This occurs when
demand for the product is constant and there are no price changes with changes
in output.
If average revenue (AR) is
greater than marginal revenue (MR), it suggests that each additional unit sold
is generating less revenue than the average unit. This typically occurs when
the company lowers the price to sell more units and capture a larger market
share. The decrease in price leads to a decrease in revenue per unit.
If average revenue (AR) is
less than marginal revenue (MR), it implies that each additional unit sold is
generating more revenue than the average unit. This often happens when the
company increases the price, resulting in higher revenue per unit sold.
Understanding the
relationship between TR, AR, and MR is crucial for businesses to make pricing
decisions, determine the level of production, and maximize their revenue. By
analyzing these concepts, companies can optimize their pricing strategies and
revenue generation in different market conditions.
BEHAVIOUR OF AR AND MR CURVVES UNDER
DIFFERENT MARKET CONDITIONS
The behavior of average
revenue (AR) and marginal revenue (MR) curves varies under different market
conditions. Let's examine the behavior of AR and MR curves in different market
structures:
Perfect Competition:
In perfect competition,
there are many buyers and sellers, and no individual firm has control over the
market price. Both AR and MR curves are horizontal and coincide with each
other. This is because the firm can sell any quantity of output at the prevailing
market price. Since the market sets the price, the firm's revenue does not
change as it increases its output. Therefore, both AR and MR remain constant.
Monopoly:
In a monopoly market, there
is a single seller with significant control over the market. The firm faces a
downward-sloping demand curve. The AR curve is also downward-sloping and lies
above the demand curve. This is because the firm must lower the price to sell
more units of output. However, the MR curve lies below the demand curve and has
a steeper slope. This is because, in a monopoly, the firm must lower the price
on all units to sell an additional unit, resulting in a decline in MR.
Monopolistic
Competition:
In monopolistic competition,
there are many sellers offering differentiated products. Each firm has some
control over its price due to product differentiation. The AR curve is
downward-sloping, reflecting the firm's ability to influence price. The MR
curve lies below the AR curve and has a steeper slope. This is because, in
order to sell an additional unit, the firm must lower the price not only on
that unit but also on previously sold units, resulting in a decline in MR.
Oligopoly:
In an oligopoly market,
there are a few large firms that dominate the industry. The behavior of AR and
MR curves in an oligopoly depends on the interdependence of firms and their
strategic behavior. The shape of the curves can vary based on the specific
market dynamics and competitive strategies adopted by the firms.
It's important to note that
the behavior of AR and MR curves influences a firm's profit maximization
decision. In perfect competition, profit is maximized when MR equals marginal
cost (MC). In monopolistic competition, monopoly, and oligopoly, profit
maximization occurs when MR equals MC, but the pricing and output decisions are
influenced by market power, product differentiation, and strategic
considerations.
Understanding the behavior
of AR and MR curves helps firms determine their pricing strategies, production
levels, and revenue optimization strategies based on the market structure in
which they operate.
VERY SHORT QUESTIONS
ANSWER
Q.1. Define the concept to Revenue?
Ans. Income.
Q.2. State Average Revenue?
Ans. Price.
Q.3.Which concept of Revenue is the
also termed as price?
Ans. Average Revenue.
Q.4. Define Marginal Revenue?
Ans. Change.
Q.5.What is the nature of AR and MR
curve Under perfect competition?
Ans. Horizontal.
SHORT QUESTIONS ANSWER
Q.1. Show with the help of diagram that
total revenue is maximum when marginal revenue is zero?
Ans. Certainly! In a diagram, the relationship between total
revenue (TR) and marginal revenue (MR) can be illustrated to show that total
revenue is maximized when marginal revenue is zero. Here's a diagram to
demonstrate this:
lua
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^
|
TR | .--
|
/
|
/
| /
|/
+-----------------
MR
In the diagram, the x-axis
represents the quantity of output or sales, and the y-axis represents the
revenue. The Total Revenue (TR) curve is plotted as a upward-sloping line,
starting from the origin and increasing as the quantity of output increases.
The Marginal Revenue (MR) curve is plotted as a line that intersects the x-axis
at the point where MR is zero.
As output or sales increase,
the TR curve initially slopes upwards, indicating that total revenue increases.
The MR curve intersects the x-axis at the quantity where MR is zero. Beyond
this point, the MR curve dips below the x-axis, indicating that marginal
revenue becomes negative.
At the point where MR is
zero, the TR curve reaches its maximum. This means that any further increase in
output would result in a decline in marginal revenue and, consequently, a
decrease in total revenue. Therefore, total revenue is maximized when marginal
revenue is zero.
This relationship holds true
under the assumption of perfect competition, where firms are price takers and
face a horizontal demand curve. In other market structures, the relationship
between TR and MR may differ.
Q.2. State the relationship between AR
and MR under?
Ans. The relationship between Average Revenue (AR) and
Marginal Revenue (MR) depends on the market structure in which a firm operates.
Here are the relationships between AR and MR under different market structures:
Perfect Competition:
Under perfect competition,
AR and MR are equal and coincide with each other. This is because a perfectly
competitive firm is a price taker and can sell any quantity of output at the
prevailing market price. Since the price remains constant for each unit sold, both
AR and MR curves are horizontal and have the same value.
Monopoly:
In a monopoly market, AR is
always greater than MR. The AR curve is downward-sloping as the monopolist has
to lower the price to sell more units of output. The MR curve lies below the AR
curve and has a steeper slope. This is because the monopolist can only increase
its sales by reducing the price on all units, resulting in a decline in MR.
Monopolistic
Competition:
In monopolistic competition,
AR is also greater than MR. The AR curve is downward-sloping due to product
differentiation and the ability of firms to set their own prices to some
extent. The MR curve lies below the AR curve and has a steeper slope. Similar
to a monopoly, to sell an additional unit, a firm must lower the price on all
units, resulting in a decrease in MR.
Oligopoly:
In an oligopoly market, the
relationship between AR and MR depends on the specific strategic behavior of
the firms. It can vary based on factors such as the number of competitors,
product differentiation, and the interdependence among firms. The behavior of
AR and MR curves in an oligopoly is complex and can differ based on the
specific market dynamics.
In summary, under perfect
competition, AR and MR are equal, while in monopoly and monopolistic competition,
AR is greater than MR. The difference between AR and MR indicates the impact of
each additional unit sold on the firm's revenue. Understanding the relationship
between AR and MR is crucial for firms to make pricing and output decisions to
maximize their profits in different market structures.
Q.3. Define TV AR and MR Discuss the
relationship between then with the help of table and diagram?
Ans. TV, AR, and MR stand for Total Revenue, Average Revenue,
and Marginal Revenue, respectively. Let's discuss their definitions and the
relationship between them using a table and diagram.
Total Revenue (TR):
Total Revenue is the overall
income generated from the sale of a firm's goods or services. It is calculated
by multiplying the quantity of output sold by the price per unit. The formula for
TR is TR = Quantity x Price.
Average Revenue (AR):
Average Revenue represents
the revenue generated per unit of output. It is calculated by dividing the
Total Revenue by the quantity of output sold. The formula for AR is AR = TR /
Quantity.
Marginal Revenue (MR):
Marginal Revenue refers to
the change in Total Revenue resulting from the sale of one additional unit of
output. It is calculated by taking the difference between the Total Revenue of
the current level of output and the Total Revenue of the previous level of
output. The formula for MR is MR = Change in TR / Change in Quantity.
Now, let's demonstrate the
relationship between TR, AR, and MR using a table and diagram:
bash
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Table:
Quantity | Price | Total Revenue | Average Revenue |
Marginal Revenue
-----------------------------------------------------------------------------------------------
1 | $10 |
$10
| $10 | $10
2
| $10 | $20
| $10 | $10
3
| $10 | $30 |
$10
| $10
4
| $10 | $40
| $10 |
$10
In the table, we assume a
constant price of $10 per unit of output. As the quantity of output increases,
the Total Revenue also increases. However, since the price remains constant,
both Average Revenue and Marginal Revenue also remain the same throughout each
level of output.
lua
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Diagram:
^
|
TR
--| .--
AR
--|---------------- /
MR
--|----------------/
|
+------------------------
Quantity
In the diagram, the x-axis
represents the quantity of output, and the y-axis represents the revenue. The
Total Revenue (TR) curve is a straight line that slopes upward at a constant
rate, as each additional unit sold contributes equally to the increase in TR.
The Average Revenue (AR) curve is a horizontal line, indicating that AR remains
constant as the quantity of output changes. The Marginal Revenue (MR) curve
coincides with the AR curve and is also a horizontal line.
The relationship between TR,
AR, and MR in the table and diagram illustrates that when the price per unit
remains constant, both AR and MR remain constant as well. The constant AR
indicates that each unit of output sold contributes the same amount to the
revenue. The constant MR suggests that each additional unit sold generates the
same amount of additional revenue.
Understanding the
relationship between TR, AR, and MR is crucial for firms to make pricing and
output decisions and analyze their revenue optimization strategies.
Q.4. Explain the nature and shape of AR
and MR in detail under different situations?
Ans. The nature and shape of Average Revenue (AR) and Marginal
Revenue (MR) curves can vary under different market situations. Let's discuss
the nature and shape of AR and MR curves under different market structures:
Perfect Competition:
In perfect competition, AR
and MR curves have a horizontal or perfectly elastic shape. This is because a
perfectly competitive firm is a price taker and sells its output at the
prevailing market price. The demand curve facing the firm is perfectly elastic,
meaning that it can sell any quantity of output at the same price.
Consequently, the AR and MR curves coincide with the horizontal demand curve.
Both AR and MR remain constant at the market price.
Monopoly:
Under a monopoly, the AR
curve is downward-sloping. This is because a monopolist faces the entire market
demand curve, which is downward-sloping. As the monopolist decreases the price
to sell more output, the average revenue earned from each unit sold decreases.
Consequently, the AR curve has a negative slope.
The MR curve in a monopoly
is also downward-sloping, but it lies below the AR curve. The MR curve is
steeper than the AR curve because to sell additional units, the monopolist must
reduce the price for all units sold. As a result, the MR curve lies below the
AR curve and has a more negative slope.
Monopolistic
Competition:
In monopolistic competition,
the AR curve is downward-sloping due to product differentiation. Firms have
some degree of market power, allowing them to set prices above their marginal
cost. The AR curve reflects the price-demand relationship for the
differentiated product.
The MR curve in monopolistic
competition also has a negative slope and lies below the AR curve. However, the
exact shape of the MR curve depends on the elasticity of demand for the firm's
product. If the demand is relatively elastic, the MR curve will be more elastic
than the AR curve. If the demand is relatively inelastic, the MR curve will be
less elastic than the AR curve.
Oligopoly:
In an oligopoly market, the
nature and shape of AR and MR curves can vary based on the behavior of the
firms. The AR curve typically has a downward-sloping shape due to product
differentiation and market power. However, the MR curve's shape depends on the
strategic behavior of the firms and the interdependence among them. It can vary
from being relatively elastic to relatively inelastic, depending on factors
such as the number of competitors and the reaction of competitors to price
changes.
In summary, under perfect
competition, AR and MR curves are horizontal. In monopoly and monopolistic
competition, the AR curve is downward-sloping, and the MR curve lies below it.
In oligopoly, the shape of AR and MR curves can vary based on the specific market
dynamics and strategic behavior of the firms.
LONG QUESTIONS ANSWER
Q.1. Define TR AR and MR Derive AR and
MR from TR with help of table and diagram?
Ans. Certainly! Let's define Total Revenue (TR), Average
Revenue (AR), and Marginal Revenue (MR) and derive AR and MR from TR using a
table and diagram.
Total Revenue (TR):
Total Revenue refers to the
overall income generated from the sale of a firm's goods or services. It is
calculated by multiplying the quantity of output sold (Q) by the price per unit
(P). The formula for TR is TR = P * Q.
Average Revenue (AR):
Average Revenue represents
the revenue generated per unit of output. It is calculated by dividing the
Total Revenue (TR) by the quantity of output sold (Q). The formula for AR is AR
= TR / Q.
Marginal Revenue (MR):
Marginal Revenue refers to
the change in Total Revenue resulting from the sale of one additional unit of
output. It is calculated by taking the difference between the Total Revenue of
the current level of output and the Total Revenue of the previous level of
output. The formula for MR is MR = ΔTR / ΔQ.
Now, let's derive AR
and MR from TR using a table and diagram:
bash
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Table:
Quantity (Q) | Price (P) |
Total Revenue (TR) | Average Revenue (AR) | Marginal Revenue (MR)
---------------------------------------------------------------------------------------------------------
1
| $10 |
$10
| $10 |
-
2
| $10 |
$20
| $10 |
$10
3
| $10 | $30
| $10 |
$10
4
| $10 |
$40
| $10 | $10
In the table, we assume a
constant price of $10 per unit of output. As the quantity of output increases,
the Total Revenue (TR) also increases. To derive AR and MR, we use the formulas
mentioned earlier.
Deriving Average
Revenue (AR):
To calculate AR, we divide
the Total Revenue (TR) by the quantity of output sold (Q). In this case, since
the price per unit (P) remains constant at $10, AR is equal to $10 for each
level of output.
Deriving Marginal
Revenue (MR):
To calculate MR, we find the
change in Total Revenue (ΔTR) resulting from the sale of one additional unit of
output (ΔQ). In the given table, MR remains constant at $10 for each additional
unit of output sold. This is because the price per unit (P) remains constant,
and the Total Revenue increases by the same amount with each additional unit
sold.
lua
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Diagram:
^
|
TR --|
AR --|---------------------
MR --|---------
|
+---------------------
Quantity
(Q)
In the diagram, the x-axis
represents the quantity of output (Q), and the y-axis represents the revenue.
The Total Revenue (TR) curve is a straight line that slopes upward at a
constant rate since TR increases by the same amount with each additional unit
sold. The Average Revenue (AR) curve coincides with the horizontal demand curve
because AR is equal to the price per unit. The Marginal Revenue (MR) curve also
coincides with the AR curve and is a horizontal line at the same level.
The table and diagram
demonstrate that in this scenario, AR is equal to the price per unit ($10) and
MR remains constant at $10. This occurs when the price per unit is constant, as
is the case under perfect competition.
Note: The values in the
table and the shape of the curves may vary depending on the specific market
conditions and assumptions. The example provided assumes constant
Q.2. Explain the behavior of AR and MR
CURVES UNDER Different market forms?
Ans. The behavior of Average Revenue (AR) and Marginal Revenue
(MR) curves varies under different market forms. Let's discuss the behavior of
AR and MR curves under the following market forms:
Perfect Competition:
Under perfect competition,
the AR curve is a horizontal line at the market price. This is because a
perfectly competitive firm is a price taker and sells its output at the
prevailing market price. The firm's individual demand curve is perfectly
elastic, meaning that it can sell any quantity of output at the same price. As
a result, the AR curve coincides with the horizontal demand curve.
The MR curve in perfect
competition is also a horizontal line and coincides with the AR curve. This is
because each additional unit of output sold by a perfectly competitive firm
adds the same amount of revenue, and the market price remains constant.
Therefore, the MR curve is flat and equal to the market price.
Monopoly:
Under a monopoly, the AR
curve is downward-sloping. A monopolist faces the entire market demand curve
and has the ability to set the price of its product. As the monopolist
decreases the price to sell more output, the average revenue earned from each
unit sold decreases. Consequently, the AR curve has a negative slope and is
downward sloping.
The MR curve in a monopoly
is also downward-sloping but lies below the AR curve. The MR curve is steeper
than the AR curve because to sell additional units, the monopolist must reduce
the price for all units sold. As a result, the MR curve lies below the AR curve
and has a more negative slope.
Monopolistic
Competition:
In monopolistic competition,
the AR curve is downward-sloping due to product differentiation and imperfect
competition. Firms have some degree of market power, allowing them to set
prices above their marginal cost. The AR curve reflects the price-demand
relationship for the differentiated product.
The MR curve in monopolistic
competition is also downward-sloping and lies below the AR curve. However, the
exact shape of the MR curve depends on the elasticity of demand for the firm's
product. If the demand is relatively elastic, the MR curve will be more elastic
than the AR curve. If the demand is relatively inelastic, the MR curve will be less
elastic than the AR curve.
Oligopoly:
In an oligopoly market, the
behavior of AR and MR curves depends on the strategic behavior of the firms and
the interdependence among them. The AR curve can be downward-sloping or kinked,
indicating the price-demand relationship based on the firms' pricing decisions
and reactions. The exact shape of the AR curve in oligopoly can vary based on
factors such as the number of competitors and their pricing strategies.
The MR curve in oligopoly
can also exhibit various shapes depending on the strategic behavior of the
firms. It can be discontinuous or have multiple segments due to strategic
pricing behavior and reactions among the firms. The shape of the MR curve is determined
by how competitors respond to price changes and adjust their quantity supplied.
In summary, under perfect
competition, AR and MR curves are horizontal and coincide with the market
price. In monopoly and monopolistic competition, the AR curve is downward-sloping,
and the MR curve lies below it. In oligopoly, the shape of AR and MR curves can
vary based on the specific market dynamics and strategic behavior of the firms.
Q.3. Discuss the relationship between
AR and MR in detail different situations?
Ans. The relationship between Average Revenue (AR) and
Marginal Revenue (MR) varies depending on the market structure and the firm's
pricing power. Let's discuss the relationship between AR and MR in different
market situations:
Perfect Competition:
In perfect competition, AR
and MR are equal and coincide with the market price. Since a perfectly
competitive firm is a price taker, it faces a horizontal demand curve. This
means that the firm can sell any quantity of output at the same price.
Consequently, the AR curve is a horizontal line, and the MR curve is also a
horizontal line at the same level as AR. The relationship between AR and MR is
that they are equal and constant.
Monopoly:
In a monopoly, the
relationship between AR and MR is different. A monopolist faces the entire
market demand curve and has the power to set the price of its product. Since
the monopolist is the sole seller in the market, it faces a downward-sloping
demand curve. As the monopolist decreases the price to sell more units, the AR
decreases.
The relationship between AR
and MR in monopoly is such that MR is less than AR. This is because to sell an
additional unit of output, the monopolist must lower the price for all units
sold. Consequently, the MR curve lies below the AR curve and has a more
negative slope. The monopolist maximizes its profit by producing where MR
equals Marginal Cost (MC).
Monopolistic
Competition:
In monopolistic competition,
each firm faces a downward-sloping demand curve due to product differentiation
and imperfect competition. The relationship between AR and MR is similar to
that in monopoly. As firms lower the price to attract more customers, the AR
decreases.
The relationship between AR
and MR in monopolistic competition is that MR is less than AR. However, the exact
shape of the MR curve depends on the elasticity of demand for the firm's
product. If demand is relatively elastic, meaning that customers are responsive
to price changes, the MR curve will be more elastic than the AR curve. If
demand is relatively inelastic, the MR curve will be less elastic than the AR
curve.
Oligopoly:
In oligopoly, the
relationship between AR and MR depends on the strategic behavior of the firms
and the interdependence among them. The exact relationship can vary based on
the specific market dynamics and firms' pricing strategies. Firms in an
oligopoly are aware of their mutual interdependence and consider the reactions
of their competitors when making pricing decisions.
The relationship between AR
and MR in oligopoly can exhibit various patterns. It can be discontinuous or
have multiple segments due to strategic pricing behavior. The shape of the MR
curve is determined by how competitors respond to price changes and adjust
their quantity supplied. The specific relationship between AR and MR in
oligopoly depends on the strategic interactions among the firms in the market.
In summary, in perfect
competition, AR and MR are equal and constant. In monopoly and monopolistic
competition, MR is less than AR due to the downward-sloping demand curve. In
oligopoly, the relationship between AR and MR can vary based on the strategic behavior
and interdependence among the firms.
