Comparative Study of Revenue Curves under Different Markets

Definition and price behaviour

• Many buyers and many sellers; each firm is very small compared to the whole industry.
• A single firm cannot influence the market price; it is a price taker and sells any quantity at the given market price.

Revenue schedule (Table 5, Price = ₹5)

• TR increases by the same amount (₹5) when each additional unit is sold.
• AR remains constant at ₹5, and MR is also constant at ₹5 for every extra unit.

Shape of curves

• TR curve: a straight line from the origin, rising at a constant rate.
• AR curve: horizontal straight line at price = ₹5.
• MR curve: coincides with the AR curve, also horizontal at ₹5.

Because price is the same for all units, AR = MR under perfect competition.

Definition and price behaviour

• Single seller of a product with no close substitutes.
• The monopolist is a price maker: to sell more, the firm must lower the price, so the AR (demand) curve slopes downward.

Revenue schedule with constant TR (Table 6)

• Whatever the combination of price and quantity, TR stays at ₹20.
• Since TR does not rise when output increases, MR is zero over this range.

Rectangular hyperbola AR and MR

• The AR curve is shaped like a rectangular hyperbola such that Price × Quantity is constant (TR = constant).
• At every point on the AR curve, the rectangle under it (P × Q) has the same area. Hence, TR is the same, and MR = 0.
• The MR curve in this special case lies along the X‑axis (coincides with OX).

Nature of market

• Many firms selling differentiated but close-substitute products (toothpaste brands, soaps, restaurants, etc.).
• Each firm faces a downward-sloping AR (demand) curve but with more elasticity than pure monopoly.

Illustration with a part of revenue schedule 

• 2 units sold at ₹5 each → TR = ₹10.
• To sell 3 units, the price is reduced to ₹4 → TR = ₹12, not ₹15.
• The third unit adds only ₹2 to TR, so the MR of the third unit is ₹2, while its price (AR) is ₹4.
• This is because the price cut applies to all units, not only to the marginal one.

TR, AR, and MR behaviour 

• AR curve slopes downward from left to right.
• MR curve lies below AR and falls faster; it may become zero and then negative.
• TR curve first rises at a diminishing rate as output increases, reaches a maximum point N, and then starts falling.
• At the output where TR is maximum (point N on TR), MR = 0.

Definition and interdependence

• A few large firms dominate the market (telecom, airlines, soft drinks).
• Each firm’s price and output decisions influence rivals, and firms watch each other’s moves closely.

Case (a): Rivals do not follow price increase 

• If one firm raises its price and others keep their prices unchanged, many buyers shift to the cheaper rivals.
• Demand facing the firm becomes highly elastic above the current price.
• AR curve: relatively less elastic up to point K; beyond K, it becomes highly elastic.
• MR curve: correspondingly rises discontinuously from a lower to a higher level at the output around point K.

Case (b): Kinked demand curve when rivals follow price cuts 

• If a firm believes that rivals will match price cuts but will not follow price increases, its demand curve has a kink at the present price–output combination K.
• Above K: demand is relatively elastic (few customers accept higher price when rivals stay low).
• Below K, demand is relatively inelastic (all firms cut price together, so each firm gains little extra demand).
• The MR curve has a vertical discontinuity (a gap) between points a and b at the kink; below the gap, MR continues at a lower level.
• Small changes in cost may still keep the profit-maximising output within the MR‑gap, so price tends to remain rigid.

• A farmer selling wheat in a large grain market accepts the going price. Selling one more sack adds exactly that price to TR.
• A firm with a strong monopoly over a life-saving drug may set different price–quantity combinations that all yield roughly the same total revenue when it wants to maintain a fixed revenue target.
• A restaurant reducing prices to attract more customers must charge the lower price to existing customers as well, so extra revenue from additional customers is less than the new price.
• In telecom, when one operator cuts call rates, other operators quickly match the cut. If one operator raises prices alone, many users shift to cheaper networks.

• Under perfect competition, AR = MR = Price; both are horizontal, and TR rises at a constant rate.
• Under monopoly with constant TR, AR is a rectangular hyperbola and MR = 0 along the X‑axis.
• Under imperfect competition, AR slopes downward, MR lies below AR, and TR rises at a diminishing rate, becomes maximum when MR = 0, then falls.
• Under oligopoly with kinked demand, AR has a kink and MR is discontinuous; prices become sticky around the kink.