Question

5-b b. List and explain the 3 decision process questions confronting the producer in pure competition.
1) Total Revenue = price*quantity(TR=P*Q)
2)Average Revenue = price (AR=P)
3)Marginal Revenue = price (MR=P)

Please help to explain these three aswers for the above question.

Answer 1

In a perfect or pure competition market there will be many number of sellers and buyers and sellers sells identical goods. There will be free entry and exit for the firms in the market.

1. Total revenue or total sales is the total amount a firm or seller gets after selling whole unit of output. It is also called as sales proceeds. Once the firm determines the equilibrium output, the output is to be multiplied by the price per unit to calculate the total revenue.

Total Revenue = Quantity x Price per unit

It is the total income of a business and is calculated by multiplying the quantity of goods sold by the price of the goods.

2. All the firms have to sell identical goods and they don’t have any control over the price. Price is determined by the industry. The firms are called as price takers. Since all are selling at the same price, the price will be equal to average revenue. Average revenue is the revenue per unit of output.

AR = TR/ Quantity sold

When the price is constant, AR = Price

3. When price and Average Revenue is equal the Marginal Revenue will be also equals to the price.

MR = TRn – TRn-1

Price = AR = MR

This a basic condition of a pure competition market.

It can be seen in the following imaginary table.

Quantity	Price	TR	AR	MR
1	10	10	10/1=10	10-0 =10
2	10	20	20/2=10	20-10=10
3	10	30	30/3=10	30-20=10
4	10	40	40/4=10	40-30=10

Price = AR = MR