The marginal revenue curve helps in the determination of firm’s equilibrium. It is the point of intersection between MR and MC curves which determines the point of equilibrium of a firm. Besides, to calculate the profit and loss of a firm, AR curve is essential. Thus AR and MR curves play an important role in the price-output determination of a firm.
The AR and MR curves form important tools for economic analysis.
- If the AR curve is tangent to the AC curve at the point of equilibrium, the firm earns normal profits. If the AR curve is above the AC curve, it makes super normal profits. In case the A curve is below the AC curve at the equilibrium point, the firm incurs losses.
- The AR curve is the price line for the producer in all market situations. By relating the AR curve to the AC curve of a firm, it can be found out whether it is earning supernormal of normal profits or increasing losses.
- IF the AR curve is tangent to AC curve at its minimum point (as under perfect competition) the firm producers at its full capacity. Where it is not so (as under monopoly or monopolistic competition the firm possesses idle capacity.
- The MR curve when intersected by the MC curve determines the equilibrium position of the firm under all market situations. Their point of inter section in fact determines price, output profit or loss of a firm.
- The use of the average-marginal revenue concepts to factor-services helps in determining their prices. In factor pricing they are inverted U-shaped and average and become marginal revenue productivity curves (ARP and MRP) and are a useful tool in explaining the equilibrium of the firm under different market conditions.