Revenue Curves (TR, AR, and MR) in a Perfectly Competitive Market

In a perfectly competitive market, there is a large number of firms selling homogeneous goods and an equally large number of buyers. In such a market, individual firms cannot influence the price of goods. Firms must sell goods or services at the price determined by the industry. Therefore, firms in a perfectly competitive market are price takers. If any firm tries to sell goods at a price higher than the market-determined price, it will lose all its buyers/customers.

In such a market, the price of goods or services, or the firm's average revenue, remains constant. As a result, the revenue obtained from selling each additional unit of goods or services (marginal revenue) is also equal to the market price. This means that the firm's marginal revenue and average revenue are equal.

The revenue obtained by a firm from selling goods or services can be classified into three categories:

1. Total Revenue (TR)
2. Average Revenue (AR)
3. Marginal Revenue (MR)

Table 1.5 presents the total revenue, average revenue, and marginal revenue in a perfectly competitive market.

Table 1.5: Total Revenue, Average Revenue, and Marginal Revenue in a Perfectly Competitive Market

From Table 1.5, it is evident that the price of the good remains constant at Rs. 5. As a result, regardless of the quantity sold, both average revenue and marginal revenue remain at Rs. 5. When one unit of the good is sold, total revenue is Rs. 5. As the quantity sold increases from 1 unit to 7 units, total revenue increases gradually from Rs. 5 to Rs. 35.

The curve that shows the relationship between total revenue and the quantity of goods produced is called the Total Revenue Curve.  Similarly, the curve showing the relationship between average revenue and the quantity of goods produced is called the Average Revenue Curve, and the curve showing the relationship between marginal revenue and the quantity of goods produced is called the Marginal Revenue Curve.

Based on Table 1.5, total revenue, average revenue, and marginal revenue curves are illustrated in Graph 1.5.

Graph 1.5: TR, AR, and MR under Perfect Competition

In Graph 1.5, the X-axis represents the quantity sold, while the Y-axis measures total revenue, average revenue, and marginal revenue. The total revenue curve is represented by the TR curve, the average revenue curve by the AR curve, and the marginal revenue curve by the MR curve.

The total revenue curve starts from the origin and rises at a constant rate. Since the total revenue curve starts from the origin, it indicates that when the quantity sold is zero, total revenue is also zero. Here, the total revenue curve is (linear) a straight line.

The average revenue curve is a straight line parallel to the X-axis at a height of 5 units. This is because, in a perfectly competitive market, the price (or average revenue) remains constant. Since the average revenue and marginal revenue are equal in a perfectly competitive market, the average revenue curve and marginal revenue curve coincide.