Question
Clarify the relationship between average revenue and marginal revenue through schedule and figure.
✓
Answer
- Imperfect Competitive Market :-
-
- In imperfect competitive market, monopoly. monopolistic competition and oligopoly etc. are included.
- From this market, only in perfect monopoly the average revenue curve would be rectangular hyperbola and the marginal revenue is zero and that is why its curve is on $OX$ axis.
- Generally, in these type of market particularly in monopoly and monopolistic competitive market firm has to reduce price to increase the sale.
- So the total revenue is increase at diminishing rate with increase of sale. In this situation, demand curve (average revenue curve) is seen left to right from upward to downward slope.
- In this market, firm has to decrease the price to increase the sale and that is why marginal revenue is also decrease.
- Thus, in this market both average revenue and marginal revenue decrease.
- So both curve (for average revenue & marginal revenue) has downward slope and both are different.
- With increase in sale, both average revenue and marginal revenue decreases but the decreases in marginal revenue is faster than average revenue.
- In short, in imperfect competitive market, the average revenue and marginal revenue curves have negative slopes but the marginal revenue curve is seen on the lower side than average revenue curve.
- Explanation Through Schedule :
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- In imperfect competitive market, to increase the sale, price has to decreases and total sales revenue of units of production increase at diminishing rate.
- And average revenue and marginal revenue both are decrease which can be seen through following schedule.
| Unit of Production | Total revenue (TR) (Rs.) |
Average Revenue (AR) (Rs.) |
Marginal Revenue (MR) (Rs.) |
| $1$ | $10$ | $10$ | $10$ |
| $2$ | $18$ | $9$ | $8$ |
| $3$ | $24$ | $8$ | $6$ |
| $4$ | $28$ | $7$ | $4$ |
| $5$ | $30$ | $6$ | $2$ |
| $6$ | $30$ | $5$ | $0$ |
| $7$ | $28$ | $4$ | $-2$ |
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- As per above schedule, when average revenue decrease, the marginal revenue also decrease.
- But marginal revenue decrease faster than average revenue.
- Because marginal rate of additional unit decreases.
- But this price decreases are distributed between all remaining units and because of that, average revenue is decreases as slower rate.
- When marginal revenue is zero then total sales revenue ($TR$) is maximum and fixed.
- When marginal revenue becomes negative then total sales revenue decreases.
- Average revenue never become zero and that is why average revenue curve never touch the horizontal axis.
- Presentation through figure :
-
- In imperfect competitive market, an individual firm has to reduce the price of commodity to increase the sale.
- In this situation as per given figure average revenue and marginal revenue line seen from left to right side from upward to downward (negative slope ).
- Because of decrease in price, average revenue and marginal revenue both are decrease. But the decrease in average revenue is slower than marginal revenue.
- This concept is explained through following figure.
-
- In the given figure on $OX$ axis production (sale) and on $OY$ axis revenue are given.
- As $107$per figure, average revenue curve and marginal revenue curve is seen towards downward side from left side to right side.
- Following conclusions are made for this context.
- Total revenue of the firm is increase at diminishing rate because of increase in production. Price has to decrease to increase the sale.
- In imperfect competitive market, firm has to reduce the price to increase the sale. So with increase in sale, marginal revenue is decreases.
- In this market, firm has to decrease the price to increase the sale. This matter also affects the previous units.
- Hence the disadvantage of decreases in price will be distributed amongst the all units and that's why average revenue decreases less than marginal revenue.
- With increase in production, marginal revenue decrease faster than average revenue.
- Average revenue curve seen upper side and marginal revenue curve seen lower side.
- Monopoly, monopolistic competition, oligopoly etc. markets are included in imperfect competitive market.
- In this market, average revenue curve and marginal revenue curve are seen with negative slope hence there is a difference in slope of both the curve.
- In monopoly, average revenue curve and marginal revenue curve is with negative slope and inelastic and in monopolistic competitive market, it is seen with negative slope and elastic.
- Marginal revenue can be zero but average revenue can't become zero.
- So, marginal revenue curve can be touch the horizontal axis when average revenue curve never touch it.
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