The Theory of the Firm under Perfect Competition
Revenue of a competitive firm
Compute TR, AR and MR from a price.
A competitive firm sells every unit at the same market price, p.
- Total revenue: TR = p × q. Drawn against output, it is a straight line through the origin, with slope p.
- Average revenue: AR = TR ÷ q = p.
- Marginal revenue (MR): the extra revenue from one more unit, which is also p.
So for a competitive firm, MR = AR = p.
Example: price ₹8. At 5 units, TR = 40; AR = 40 ÷ 5 = 8; at 4 units TR was 32, so MR = 40 − 32 = 8.
Drawn against output, the price line is horizontal. It is the firm's AR curve and also the demand curve it faces: the firm can sell any quantity at p, but nothing above it. That demand is perfectly elastic.
Every unit sells at the market price.
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