Question

“Price is always equal to average revenue. It is a mathematical certainty.” Discuss this statement fully. Does this imply that P is always equal to marginal revenue as well?

Answer 1

Average revenue is the income produced per unit of yield sold. It assumes a part in the assurance of a company's benefit. Per unit benefit is normal income less normal (add up to) cost. A firm by and large tries to deliver the amount of yield that augments benefit.

With the help of following equation, we can prove AR = P.

TR
As we know, AR = TR / Q .... (i)

TR = P x Q ..... (ii)
(Here, P = Price, Q = Quantity or output sold)
Thus, AR = PxQ / Q
Hence, it is proved that, AR = Price.

The relation between average revenue and quantity of output produced depends on market structure. For a perfectly competitive firm, average revenue is not only equal to price, but more importantly, it is equal to marginal revenue, all of which are constant. For a monopoly, monopolistically competitive, or oligopoly firm, average revenue is greater than marginal revenue, both of which decrease with larger quantities of output. The constant or decreasing nature of average revenue is a prime indication of the market control of a firm.