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

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• 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

Perfect Competition

The Relationship Between TR, AR & MR In Perfect Competition Can Be Seen Numerically Below

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

An illustration of the relationship between AR, MR & TR

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

Imperfect Competition

The Relationship Between TR, AR & MR For Imperfect Competition Can Be Seen Numerically Below

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

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 & 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
• When MR = 0, then the?price elasticity of demand?(PED) = 1
  • This is?unitary elasticity

• The?total revenue rule?states that in order to?maximise?revenue, firms should?increase?the price of products that are?inelastic?in demand and?decrease prices?on products that are?elastic?in demand

• This can be illustrated using an average revenue (AR) curve which is the demand curve

An illustration of price elastic demand where a small decrease in price from P1→P2?causes a large increase in quantity demanded from Q1→ Q2

Observations

• When a good/service is?price elastic in demand,?there is a greater proportional increase in the quantity demanded to a decrease in price
• TR is higher?once the price has been?decreased
  • 

An illustration of price inelastic demand where a large increase in price from P1→P2?causes a small decrease in quantity demanded from Q1→ Q2

Observations

• When a good/service is?price inelastic in demand,?there is a smaller than proportional decrease in the quantity demanded to an increase in price
• TR is higher?once the price has been?increased
  •