Average Revenue

Definition of Average Revenue

Average Revenue (AR) is the revenue earned per unit of output sold. It is calculated by dividing the Total Revenue (TR) by the Quantity (Q) of goods sold.

Formula

Where:

• AR = Average Revenue
• TR = Total Revenue (Price × Quantity)
• Q = Quantity of goods sold

Relationship Between AR and Price

• In a perfectly competitive market, AR is equal to price (P) because firms sell all units at the same price: AR=P
• In an imperfect market (monopoly or monopolistic competition), the AR curve slopes downward because firms must lower prices to sell more.

Graphical Representation of AR Curve

1. Perfect Competition: The AR curve is a horizontal straight line (AR = Price).
2. Monopoly/Oligopoly: The AR curve is downward-sloping, indicating that revenue per unit decreases as more units are sold.

1. Perfect Competition

• The AR curve is a horizontal straight line.
• Since firms are price takers, AR = Price (P).
• The firm can sell any quantity at the market price.

2. Monopoly / Imperfect Competition

• The AR curve slopes downward.
• Firms must lower the price to sell more.
• This reflects the typical demand curve in imperfect competition.

Explanation of the Graph

1. Perfect Competition (Blue Dashed Line)
   • The AR curve is horizontal because the firm can sell any quantity at the market price.
   • AR = Price (P) = Marginal Revenue (MR) in perfect competition.
2. Monopoly / Imperfect Competition (Red Line)
   • The AR curve slopes downward.
   • To sell more, the firm must reduce price, making AR decrease as quantity increases.
   • This is typical in monopoly and monopolistic competition.

Example Table of AR Calculation

👉 Observation: As quantity increases, price falls, and AR declines.

Importance of Average Revenue

✅ Helps businesses determine the impact of price changes.
✅ Assists in demand forecasting.
✅ Essential for profit maximization strategies.