Economics Perfect Competition Questions Medium
In perfect competition, marginal revenue refers to the additional revenue generated by selling one more unit of a product. It is calculated by dividing the change in total revenue by the change in quantity sold.
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 demand curve facing a perfectly competitive firm is perfectly elastic, meaning that the firm can sell any quantity of output at the market price.
Since the firm can sell any quantity at the market price, the marginal revenue for each additional unit sold is equal to the market price. This is because the firm does not need to lower the price to sell more units, as it can sell all of its output at the prevailing market price.
Therefore, in perfect competition, the marginal revenue curve is a horizontal line at the market price. This implies that the marginal revenue is constant and equal to the price for each additional unit sold.
It is important to note that in perfect competition, the marginal revenue is also equal to the average revenue, as the firm sells all units at the same price. This means that the marginal revenue curve coincides with the demand curve and the average revenue curve.
Understanding the concept of marginal revenue is crucial for firms in perfect competition as it helps them make decisions regarding the optimal level of output. Firms will continue to produce additional units as long as the marginal revenue exceeds the marginal cost, as this will result in increasing profits. However, once the marginal cost exceeds the marginal revenue, it becomes unprofitable to produce additional units, and the firm should reduce its output.