Why Is Average Revenue Function Horizontal

The average cost and marginal costs are calculated from total cost.

Why is average revenue function horizontal. Since price is constant marginal revenue is also constant. This is because there are many of them they each sell the same thing so if they want to cha. In the same fashion average revenue and marginal revenue can also be calculated from total revenue. When ar and mr are parallel to x axis.

Mathematically ar tr q. Explain why the average and marginal revenue curves for a perfectly competitive firm are horizontal while those of a monopoly slope downwards. In our example average revenue is 500 100 5. 21 2 average revenue curve in this case is a horizontal straight line i e parallel to the x axis.

The average revenue curve is a horizontal line parallel to the x axis and the marginal revenue curve coincides with the average revenue curve since marginal revenue is equal to average revenue. Where ar average revenue tr total revenue and q quantity sold. The average revenue curve for a perfectly competitive firm is horizontal due to the fact that it faces perfectly elastic demand at the market determined price. It is obtained by dividing the total revenue by the number of units sold.

Thus average revenue means price. Indicated by the same horizontal line. Price ar mr. The case of perfect competition when for an individual firm average revenue or price remains constant and marginal revenue is equal to average revenue is graphically shown in fig.

1 under pure competition. The demand curve is horizontal for each of the individual firms in a perfectly competitive market. If average revenue and marginal revenue are parallel to horizontal axis then it means both ar and mr are equal to each other i e. The average revenue curve is a horizontal straight line parallel to the a axis and the marginal revenue curve coincides with it.

It is not for the whole market at least not usually. Average revenue is the revenue per unit of the commodity sold. Since price is constant marginal revenue equals price or average revenue. This means that the firm faces a horizontal average revenue demand curve and if average revenue is constant this means total revenue is increasing at a constant rate and therefore marginal.