Question
What is the relationship between TR, AR and MR under perfect competition?
✓
Answer
- In the perfect competition, a firm is a price taker.
- It has to sell its product at the same price as given (determined) by the industry. Consequently, price = AR = MR.
- Hence, a firm's AR and MR curve will be a horizontal straight line parallel to X axis.
- Since price remains the same, i.e., MR is constant, therefore, TR increases at the Constant rate as increase in the output sold.
- As the result of, TR curve facing a competitive firm is positively sloped straight line. Again, because at zero output Total Revenue is zero therefore, TR curve passes through the origin O as shown in the given figure.
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