Question

Explain the relationship between Total Revenue, Average Revenue and Marginal Revenue with the help of an imaginary table and diagrams.

Answer 1

The behaviour of the revenue curves in different market conditions is different. For example, the average and marginal revenue curve in the perfect competition market are the same, which is a straight line parallel to the X axis, whereas in monopoly and imperfect competition market, both these curves are different and sloping downward from top to bottom. 

Table related to the imperfect competition market is given below :

The following things are clear from the table –

1. The average revenue which is the price of the item is constantly decreasing. This means that the price has to be reduced to sell more commodities.
2. Marginal Revenue is also continuously decreasing, but its rate of reduction is higher than the average revenue.
3. There is a steady increase in total revenue but it is increasing at a decreasing rate.
4. The average revenue is never zero, whereas marginal revenue can be zero also, and can also be negative.

The revenues of these three can also be displayed by the adjacent figure, and total revenue, average revenue and marginal revenue curves can be obtained.

From the picture, it is clear that the AR curve is above the MR curve, because the rate of decline of AR is less than that of the MR. TR curve is showing the increasing state of TR.