Marginal, Average &Total Revenue (AQA A Level Economics)

Defining Total, Average & Marginal Revenue

• Total revenue is the total value of all sales a firm incurs

• Average revenue is the overall revenue per unit

• Marginal revenue is the extra revenue received from the sale of an additional unit of output

• The relationship between TR, AR & MR is different in perfect competition and imperfect competition

Revenue in perfect competition

The Relationship Between TR, AR & MR in Perfect Competition

• The situation in the table above is illustrated in the diagram below

Diagram: The Relationship Between Average Revenue & Marginal Revenue

An illustration of the relationship between AR, MR & TR in a perfectly competitive market

Observations

•  The firm is a price taker at P₁ (£8)

  • Every unit of output is sold at the same price

  • A higher price would decrease sales to zero

  • A lower price would result in all sellers lowering their price

• TR increases at a constant rate

• MR = AR = Demand

Revenue in imperfect competition

The Relationship Between TR, AR & MR for Imperfect Competition

• The situation in the table above is illustrated in the diagram below

Diagram: Average Revenue & Marginal Revenue in Imperfect Competition

An illustration of the relationship between AR, MR & TR for imperfect competition

Observations

•  The firm is a price maker 

  • In order to sell an additional unit of output, the price (AR) must be lowered

  • Both AR and MR fall with additional units of sale

  • When the AR falls, the MR falls by twice as much

    • The gradient of the MR curve is twice as steep as the AR curve

  • TR is maximised when MR = 0

• AR is the demand (D) curve

• From the point where MR = 0, the total revenue begins to fall