8.3 : Revenues in Perfect Competition

In a perfectly competitive market, firms consider three ways to measure revenues: Total Revenue (TR), Marginal Revenue (MR), and Average Revenue (AR).

Total Revenue: Total income from sales, calculated by multiplying the product's selling price by the quantity sold.

Marginal Revenue: The change in total income generated by selling one more unit of the product.

Average Revenue: Revenue earned per unit sold, which is total revenue divided by total units sold. Under perfect competition, AR is equal to the product's selling price, because all units are sold at the same price.

For instance, imagine a local farmer who markets potatoes in a perfectly competitive environment where many other farmers sell identical potatoes. If the market price for potatoes is fixed at $1 per pound and the farmer sells 200 pounds, the farmer's Total Revenue (TR) would be $200 ($1 X 200 pounds).

As the farmer can sell as many potatoes as desired at the market price, the Marginal Revenue (MR) from selling one extra pound of potatoes remains $1. Under perfect competition, the MR equals the market price.

Similarly, the Average Revenue (AR) is total revenue ($200) divided by total quantity sold (200 pounds), which is also $1 per pound, matching the market price per unit.

Under perfect competition, MR and AR are constant across all levels of quantity, and both are equal to the product's price. This illustrates that firms are "price takers" with no power to influence the market price through their sales actions.