3 Explain the difference between marginal revenue average re

3. Explain the difference between marginal revenue, average revenue, and price in perfect competition.

Solution

Marginal revenue for a perfectly competitive market can be seen as the extra revenue which can be generated when the firm sells one additional quantity of its production. It has a vital role in the profit maximization decisions as the firm will sell its products where MR=MC for maximizing the profit.

In case of a perfectly competitive market, the average revenue will be equal to the marginal revenue and it is represented by a horizontal average revenue curve. This can be seen as the total revenue generated per unit of the production sold.

The price in the competitive industry is determined at a point where the demand is equal to supply, this point is termed as equilibrium point.