Economics Perfect Competition Questions Long
In perfect competition, marginal revenue refers to the additional revenue generated by selling one more unit of output. It is the change in total revenue resulting from the sale of an additional unit of output.
In a perfectly competitive market, firms are price takers, meaning they have no control over the market price and must accept the prevailing price determined by the market forces of supply and demand. As a result, the marginal revenue for a perfectly competitive firm is equal to the market price.
To understand this concept, let's consider an example. Suppose a perfectly competitive firm sells its product at a price of $10 per unit. If the firm decides to increase its output by one unit, it will have to sell this additional unit at the prevailing market price of $10. Therefore, the marginal revenue for this firm is $10.
It is important to note that in perfect competition, the demand curve facing an individual firm is perfectly elastic, meaning that the firm can sell any quantity of output at the market price without affecting the price itself. As a result, the marginal revenue curve for a perfectly competitive firm is a horizontal line at the market price.
The relationship between marginal revenue and total revenue is also worth mentioning. In perfect competition, where the market price remains constant, the marginal revenue is equal to the average revenue (AR) and the total revenue (TR) of the firm. This is because the firm can sell any quantity of output at the market price, so the additional revenue from selling one more unit is equal to the average revenue and the total revenue.
In summary, marginal revenue in perfect competition represents the change in total revenue resulting from the sale of an additional unit of output. It is equal to the market price and is represented by a horizontal line on the marginal revenue curve.