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Total Revenue

25 April, 2016 - 09:12

While a firm in a perfectly competitive market has no influence over its price, it does determine the output it will produce. In selecting the quantity of that output, one important consideration is the revenue the firm will gain by producing it.

A firm’s total revenue is found by multiplying its output by the price at which it sells that output. For a perfectly competitive firm, total revenue (TR) is the market price (P) times the quantity the firm produces (Q), or

EQUATION 9.1

TR = P × Q

The relationship between market price and the firm’s total revenue curve is a crucial one. Panel (a) of Figure 9.3 shows total revenue curves for a radish grower at three possible market prices: $0.20,$0.40, and $0.60 per pound. Each total revenue curve is a linear, upward-sloping curve. At any price,the greater the quantity a perfectly competitive firm sells, the greater its total revenue. Notice that the greater the price, the steeper the total revenue curve is.

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Figure 9.3 Total Revenue, Marginal Revenue, and Average Revenue
 

Panel (a) shows different total revenue curves for three possible market prices in perfect competition. A total revenue curve is a straight line coming out of the origin. The slope of a total revenue curve is MR; it equals the market price (P) and AR in perfect competition. Marginal revenue and average revenue are thus a single horizontal line at the market price, as shown in Panel (b). There is a different marginal revenue curve for each price.