(i)Average Revenue: It refers to the revenue per unit of output sold. It is obtained by dividing the total revenue by the number of units of output sold.
So, AR = TR/Q where, AR is Average Revenue, TR is Total Revenue and Q is quantities sold. Under perfect competition, the AR will be equal to the market price. This is because, in perfect competitive market, the seller sells his product at the same price which is prevailing in the market. If the seller sells at a lower price, he incurs losses or if he increases the price, he may lose his customers.
The AR curve of a firm is also the demand curve of the customers, because the price paid by the consumer for each unit is the average revenue from the seller’s point of view.
(ii)Marginal Revenue: The Marginal Revenue is the additional revenue’ which the firm earns from the sale of additional units of output. It is obtained as MR = TRn – TRn-1 The Marginal Revenue is the change in a firm’s total revenue resulting from the sale of an extra unit of output.
The MR is also calculated with the help of following formula
\(MR =\frac {\textit{Change in Total Revenue}}{\textit{Change in quantity sold}} ,MR = \frac{Δ TR}{Δ Q}\)
Under perfect competition, the price remains same and all the firms sell their products at the existing price. As the price remains same, if the number of units sold gets increased, no doubt the Total Revenue increases but AR and MR remain the same.
So, the firm’s demand curve, average revenue curve and its marginal revenue curve all coincide in the same horizontal line.
