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Home Various Revenue Concepts Revenue Curves of an Individual Firm Under Perfect Competition

 

Revenue Curves of an Individual Firm Under Perfect Competition:

 

While discussing the assumptions of perfect competition, we have stated that in a perfect competition, the number of buyers and sellers is so large that an individual buyer or an individual seller cannot influence the market price.

 

A firm has to sell its products at the market price prevailing in the market. The buyers have also perfect knowledge of the quality and prices of the commodities which they wish to purchase. Similarly, a factor knows the reward which is paid to the similar factor in the country. In addition to these, the factors of production are perfectly mobile. They can freely move from one place to another place, from one occupation to another occupation, and no artificial barriers are imposed upon them by the state. The sellers sell identical and homogeneous goods.

 

Under the conditions stated above, there will be one price for the identical goods in all parts of the market. If any seller wishes to sell its goods at a price lower than the market price, its goods will be sold in no time as all the buyers have perfect knowledge of the market. If he keeps the price higher than the market price, the goods will not be sold. The seller in order to get the maximum profit will have to sell its total output at the prevailing market price as is shown in the two figs. given below:

 

Diagram/Figure:

 

 

In the fig. (14.1) markets demand and supply curves intersect at point K. KL, i.e. $5 is the market price.

 

 

In Fig. (14.2) DD is the demand curve which an individual firm has to face. A firm whether it produces 5 units or 50 units has to sell its product at the prevailing market price, i.e., at $5. If at any time the aggregate demand rises, and the price settles at PR (i.e., $8), then an individual seller can sell its products at $8. He will face the new demand curve D1 D1 as is shown in fig. (14.2).

            

Under perfect competition, the additional output is sold at the price at which, the first unit is sold. The average revenue curve is, therefore, always equal to marginal revenue and so both the curves AR and MR coincide.

 

For instance, when the market prices of a commodity is $5 per unit, the firm sells 10 units. The total revenue of the firm is $50. If it wishes to sell 11 units, an individual firm cannot alter the market price. So it has to sell the additional units also at $5. The total revenue of the firm by selling 11 units will be $5. The addition made to the total revenue by selling one more unit, i.e.. MR is $5. The average revenue is also found by dividing the total revenue by the number of goods sold $( 50 / 10 = 5, 55 / 11 = 5, 60 / 12 = 5). We therefore, find that in perfect competition marginal revenue, average revenue and price are the same. So these curves also coincide as is illustrated in the schedule and diagram.

 

Schedule:

 

Units

Price Per Unit ($)

Total Revenue ($)

Marginal ($)

Average Revenue ($)

10

5

50

5

5

11

5

55

5

5

12

5

60

5

5

13

5

65

5

5

14

5

70

5

5

15

5

75 

5

5

16

5

80

5

5

 

The demand curve which a firm has to face in a perfect competitive market is a horizontal straight line parallel to the quantity axis. The MR and AR curves coincide with the price line DD/. Here MR = AR = Price as is shown in figure 14.3.

 

Relevant Articles:

Types/Kinds of Revenues
Revenue Curves of an Individual Firm Under Perfect Competition

Revenue Curves of an Individual Firm Under Imperfect Competition

 

Principles and Theories of Micro Economics
Definition and Explanation of Economics
Theory of Consumer Behavior
Indifference Curve Analysis of Consumer's Equilibrium
Theory of Demand
Theory of Supply
Elasticity of Demand
Elasticity of Supply
Equilibrium of Demand and Supply
Economic Resources
Scale of Production
Laws of Returns
Production Function
Cost Analysis
Various Revenue Concepts
Price and output Determination Under Perfect Competition
Price and Output Determination Under Monopoly
Price and Output Determination Under Monopolistic/Imperfect Competition
Theory of Factor Pricing OR Theory of Distribution
Rent
Wages
Interest
Profits
Principles and Theories of Macro Economics
National Income and Its Measurement
Principles of Public Finance
Public Revenue and Taxation
National Debt and Income Determination
Fiscal Policy
Determinants of the Level of National Income and Employment
Determination of National Income
Theories of Employment
Theory of International Trade
Balance of Payments
Commercial Policy
Development and Planning Economics
Introduction to Development Economics
Features of Developing Countries
Economic Development and Economic Growth
Theories of Under Development
Theories of Economic Growth
Agriculture and Economic Development
Monetary Economics and Public Finance

History of Money
 

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