Question

Using a diagram, explain the relationship between MR and TR under imperfect competition. 

Explain with the help of a diagram, the relationship between MR and TR under imperfect competition.

Answer 1

We are now in a position to describe the relationship between the TR curve and the MR curve. The relationship can be summed up as follows:

1. Marginal revenue is positive within this range when total revenue rises in parallel with output. The figure shows that total revenue rises to the output OQ level. As a result, marginal revenue is positive up to the OQ level of output and declines as output increases.
2. At the OQ level of output, marginal revenue is zero when total revenue is at its highest and, hence, remains constant for some time. The MR curve thus crosses the X-axis at Q.
3. Marginal revenue is negative across this range when total revenue decreases as quantity rises (the TR curve slopes downward beyond M). Therefore, when output reaches the OQ threshold, the MR curve falls below the X-axis, signifying negative marginal revenue.

Consequently, the MR curve changes from a positive to a negative value when the TR slope shifts from positive to negative.

The behavior of marginal revenue can also be used to explain the link between total revenue and marginal revenue in the manner described below:

1. An increase in output results in an increase in total income when marginal revenue is positive.
2. Total revenue is at its highest when marginal revenue is zero.
3. Total revenue decreases as output rises when marginal revenue turns negative.