Authors libby rittenberg 478
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Price also equals average revenue, which is total revenue divided by
quantity. Equation 9.1 gives total revenue, TR. To obtain average
revenue (AR), we divide total revenue by quantity, Q. Because total
revenue equals price (P) times quantity (Q), dividing by quantity leaves
us with price.
Equation 9.2
AR=TR=P×Q=P
Q Q
The marginal revenue curve is a horizontal line at the market price, and
average revenue equals the market price. The average and marginal
revenue curves are given by the same horizontal line. This is consistent
with what we have learned about the relationship between marginal and
average values. When the marginal value exceeds the average value, the
average value will be rising. When the marginal value is less than the
average value, the average value will be falling. What happens when the
average and marginal values do not change, as in the horizontal curves of
Panel (b) ofFigure 9.4 "Total Revenue, Marginal Revenue, and Average
Revenue"? The marginal value must equal the average value; the two
curves coincide.
Marginal Revenue, Price, and Demand for the
Perfectly Competitive Firm
We have seen that a perfectly competitive firm’s marginal revenue curve is
simply a horizontal line at the market price and that this same line is also
the firm’s average revenue curve. For the perfectly competitive
Attributed to Libby Rittenberg and Timothy Tregarthen
Saylor URL: />
Saylor.org
478
