Average and Marginal Revenue Curves Under Perfect Competition

In Prefect competition every firm sells its output at a given price, and can sell as much as it likes at this price. Hence the firm’s average and marginal revenue become constant and equal. The corresponding AR and MR curve is one and the same and horizontal to the X-axis. Thus in perfect competition MR = AR (or P) . This is illustrated in the foregoing example and diagram.

Unit of a Commodity TR

(Rs.)

AR

(Rs.)

MR (Rs. )

Revenue

 
1 60 20 20
2 80 20 20
3 100 20 20
4 120 20 20

 

This is because under pure or perfect competition the number of firms selling an identical product is very large. The market forces supply demand so that only one price tends to prevail for the whole industry determines the price. It is OP shown in figure each firm can sell as much as it wishes at the ruling market price OP. Thus the demand for the firm’s product becomes infinitely elastic. Since the demand curve is the firm’s average revenue curve, the shape of the AR curve is horizontal to the X-axis at price OP as shown in panel of fig and the MR curve coincide with it. This is also shown in the table where AR and MR remain constant at Rs. 20 at every level of output. Any change in the demand and supply conditions will change the Market price of the product and consequently the horizontal AR curve of the firm.

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