Revenue curve under Perfect Competition

Revenue curve under Perfect Competition

Revenue curve under perfect competition for a firm is represented by a straight line parallel to the X-axis showing output. The average revenue or price and MR remain constant for the firm.

 

Revenue curve under Perfect Competition:

Under perfect competition or Perfectly competitive market, the firm is a price taker. It cannot change the market price as it has to sell its products at the price prevailing in the market. If a firm tries to sell its products at a price above the market price, it can lose its customers in the market. It is because there would be other firms in the market which sell the same products at the price prevailing in the market or at a lower price than the firm’s price.

Therefore, under perfect competition, the firm has to accept the price prevailing in the market-determined by market forces such as demand and supply. Hence, it means that the average revenue or the price would remain constant for the firm. Furthermore, constant AR implies constant MR. Thus, it means that under perfect competition, AR=MR=Price. 

It can be well explained with the help of tabular and graphical representation:

Tabular Representation:

The following schedule illustrates the behaviour of AR, MR and TR in a perfectly competitive market:

Output/Sales

(in units)

Q

Average Revenue

AR = TR/Q =Price

(In Rs.)

Total Revenue

TR= AR*Q

(In Rs)

Marginal Revenue

MR = TRn– TRn-1 

(In Rs.)

1 10 1*10=10 10
2 10 2*10=20 10
3 10 3*10=30 10
4 10 4*10=40 10
5 10 5*10=50 10

In the above table, it is clearly evident that the price or AR of the product for the firm is Rs.10 per unit. Also, It remains constant for all levels of output. Furthermore, Constant AR leads to

  1. Constant MR.
  2. AR =MR= Rs.10

Graphical Representation:

Revenue curve under Perfect Competition - Revenue curve under Perfect Competition
Revenue curve under Perfect Competition

In fig, X-axis shows the output sold and the Y-axis shows the revenue. Here, the horizontal straight line A indicates the firm’s revenue curve( price line or demand curve). It implies that at Rs.10 per unit, the seller or firm can sell any quantity of output. Therefore, the firm’s AR curve is perfectly elastic under perfect competition.

 

 

 

 

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