why do the demand and marginal revenue curves coincide
Introduction Cost and revenue are just like two different faces of the same coin. The costs and revenues of a firm determine its nature and the levels of profit. Cost refers to the expenses incurred by a producer for the production of a commodity. Revenue denotes the amount of income, which a firm receives by the sale of its output. The revenue concepts commonly used in economic are total revenue, average revenue and marginal revenue. Total Revenue Total revenue refers to the total sale proceeds of a firm by selling its total output at a given price. Mathematically TR = PQ, where TR = Total Revenue, P = Price, Q = Quantity sold. Suppose a firm sells 100 units of a product at the price of $5 each, the total revenue will be 100 Г $5 = $500. Average Revenue Average revenue is the revenue per unit of the commodity sold. It is obtained by dividing the total revenue by the number of units sold. Mathematically AR = TR/Q; where AR = Average revenue, TR = Total revenue and Q = Quantity sold. In our example, average revenue is = 500/100 = $5. Thus, average revenue means price. Marginal Revenue Marginal revenue is the addition to total revenue by selling one more unit of the commodity. Algebraically it is the total revenue earned by selling вnв units of the commodity instead of n-1.
N = Any given number of units sold. Suppose 5 units of a product are sold at a revenue of $50 and 6 units are sold at a total revenue of $60. The marginal revenue will be $60 - $50 = $10. It implies that the 6 unit earns an additional income of $10. Relationship between AR and MR curve Let us consider the relationship between marginal, average and total revenue under pure completion and under imperfect competition. 1. Under Pure competition Under pure (or perfect) competition, a very large number of firms are assumed to be present. The supply of each seller is just like a drop of water in a mighty ocean so that any increase or decrease in production by any one firm exerts no perceptible influence on the total supply and on the price in the market. The collective forces of demand and supply determine the price in the market so that only one price tends to prevail for the whole industry. Each firm has to take the market price as given and sell its quantity at the ruling market price. In simple terms, the firm is a вprice-takerв and the firmвs demand curve is infinitely elastic. As the firm sells more and more at the given price, its total revenue will increase but the rate of increase in the total revenue will be constant, since AR = MR. MARGINAL REVENUE CURVE, PERFECT COMPETITION: A curve that graphically represents the relation between the marginal revenue received by a perfectly competitive firm for selling its output and the quantity of output sold.
Because a perfectly competitive firm is a price taker and faces a horizontal demand curve, its marginal revenue curve is also horizontal and coincides with its average revenue (and demand) curve. A perfectly competitive firm maximizes profit by producing the quantity of output found at the intersection of the marginal revenue curve and marginal cost curve. Perfect competition is a with a large number of small firms, each selling identical goods. Perfectly competitive firms have perfect knowledge and perfect mobility into and out of the market. These conditions mean perfectly competitive firms are s, they have no and receive the going market price for all output sold. The marginal revenue curve reflects the degree of market control held by a firm. For a perfectly competitive firm, the marginal revenue curve is a horizontal, or, line. For a, or monopolistically competitive firm, the marginal revenue curve is negatively sloped and lies below the (demand) curve. Marginal revenue is commonly represented by a marginal revenue curve, such as the one labeled MR and displayed in the exhibit to the right.
This particular marginal revenue curve is that for zucchini sales by Phil the zucchini grower, a presumed perfectly competitive firm. The vertical axis measures marginal revenue and the horizontal axis measures the quantity of output (pounds of zucchinis). Although quantity on this particular graph stops at 10 pounds of zucchinis, the nature of indicates it could easily go higher. This curve indicates that if Phil sells the first pound of zucchinis (an increase in production from 0 to 1), then his extra revenue is $4. However, if he sells his tenth pound (an increase in production from 9 to 10), then he also receives $4 of extra revenue. Should he sell his hundredth pound (an increase in production from 99 to 100), then he moves well beyond the graph, but his marginal revenue remains at $4. Because Phil is a perfectly competitive firm, his marginal revenue curve is also his and his average revenue curve. All three curves coincide for perfect competition. MARGINAL REVENUE CURVE, PERFECT COMPETITION, AmosWEB Encyclonomic WEB*pedia, http://www. AmosWEB. com, AmosWEB LLC, 2000-2018. [Accessed: March 17, 2018]. Check Out These Related Terms. Or For A Little Background. And For Further Study. Related Websites (Will Open in New Window). Search Again?
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