Economics Short Run Vs Long Run Costs Questions Long
Average revenue refers to the revenue generated per unit of output sold by a firm. It is calculated by dividing the total revenue earned by the quantity of output sold. Average revenue is an important concept in economics as it helps firms determine the price at which they should sell their products in order to maximize their profits.
The relationship between average revenue and marginal cost is crucial in determining the profit-maximizing level of output for a firm. Marginal cost refers to the additional cost incurred by a firm to produce one more unit of output. It is calculated by dividing the change in total cost by the change in quantity of output.
In a perfectly competitive market, where firms are price takers, the average revenue is equal to the price of the product. This is because each firm sells its output at the prevailing market price. Therefore, the average revenue curve is a horizontal line at the market price.
The profit-maximizing level of output occurs where marginal cost equals marginal revenue. Marginal revenue refers to the additional revenue earned by a firm from selling one more unit of output. In a perfectly competitive market, where average revenue is constant, marginal revenue is also equal to the average revenue.
When marginal cost is less than marginal revenue, it implies that the firm can increase its profits by producing and selling more units of output. In this case, the firm should increase its production level. On the other hand, when marginal cost exceeds marginal revenue, it indicates that the firm is incurring more costs than the additional revenue generated from producing one more unit. In this scenario, the firm should decrease its production level.
The relationship between average revenue and marginal cost is crucial in determining the profit-maximizing level of output for a firm. If the average revenue is greater than the marginal cost, it implies that the firm is earning more revenue from each unit sold than the cost incurred to produce it. This suggests that the firm should continue to increase its production level until the marginal cost equals the average revenue. At this point, the firm is maximizing its profits.
However, if the average revenue is less than the marginal cost, it indicates that the firm is earning less revenue from each unit sold than the cost incurred to produce it. In this case, the firm should decrease its production level until the marginal cost equals the average revenue. By doing so, the firm can minimize its losses.
In summary, the concept of average revenue is closely related to the marginal cost in determining the profit-maximizing level of output for a firm. The firm should increase its production level as long as the marginal cost is less than the average revenue, and decrease its production level when the marginal cost exceeds the average revenue. This relationship helps firms make informed decisions regarding their production levels and pricing strategies to maximize their profits.