Relationship between Total, Average and Marginal Revenue under Imperfect Competition

Under imperfect competition, firms must lower prices to sell more units. This changes how revenue behaves compared to perfect competition.

• Total income from selling output.
• Formula: TR = Price × Quantity 
• TR rises quickly, then slowly, reaches a highest point, and later decreases if the price drops too much.

• Money earned per unit sold; equal to price.
• Formula: AR = TR/Quantity
• AR continuously decreases as more units are sold, since price drops.

• Extra revenue from selling one more unit.
• Formula: MR = TR_n − TR_n−1
• MR falls faster than AR, reaches zero, then becomes negative if price cuts impact all sales.

• TR increases, MR is positive.
• TR at maximum, MR zero.
• TR falls, MR negative.
• AR is always more than MR (except for the first unit); both decrease, but MR drops twice as fast.

It is to be noted that while AR and MR curves coincide under perfect competition, the two curves are separate under imperfect competition.

Think of a shop selling chocolates. If the shop wants more people to buy, it lowers the price. Soon, even more sales bring less total money because the price is much lower for all customers.

• TR peaks then may fall at higher output.
• AR is the price per unit; it always drops.
• MR is below AR; it can become zero or negative.
• MR drops at double the rate of AR if the AR curve is a straight line.
• Tables and curves show how income changes in imperfect competition.