Concepts of Revenue under Different Market Conditions

 

Concepts of Revenue under Different Market Conditions

Total Revenue, Average Revenue, and Marginal Revenue behave differently in diverse situations. The principal forms of the Market situations are:

1. Perfect Competition
2. Monopoly and
3. Monopolistic Competition.

Concepts of Revenue under Perfect Competition

Perfect competition is the market situation in which there is a considerable number of buyers and sellers. The homogeneous commodity is sold at a uniform price.

All the three concepts of revenue that are total revenue, average revenue and marginal revenue under perfect competition are described hereunder:


1. Total Revenue: Under perfect competition because the price is fixed, total revenue increases at a constant rate. We note that if the price is Rs. 5, the total revenue of 2 units is Rs. 10 and of 3 units is Rs. 15. Thus, it is increasing by a constant amount of Rs. 5 for every additional unit sold.

2. Average Revenue: Average revenue or price under perfect competition does not change with the change in output sold. It is Rs. % whether the firm sells one unit or 4 units. It is because under perfect competition, price (average revenue) is determined by the industry and the firm can sell any amount at the given price.

3. Marginal Revenue: Under perfect competition, the firm has the same marginal revenue that is Rs. 5 no matter how much it sells. In fact, if Average Revenue is fixed, Marginal Revenue must also be fixed because the firm is receiving the constant price for every additional unit it is selling. Consequently, it implies that AR=MR. MR is calculated by dividing the change in total revenue by change in Quantity sold ΔTR ÷ ΔQ

For the second unit, the change in total revenue ΔTR is Rs. 10 – Rs. 5 and the change in quantity ΔQ is 2-1 = 1. Consequently, average revenue is 5 ÷ 1 = Rs. 5
Likewise, for the third unit and the fourth unit, it is Rs. 5