Question

Give the relationship between AR, MR and Elasticity of Demand.

Answer 1

At every output level, the correlation between AR, MR, and demand elasticity is quite beneficial. The price-determination process under various market conditions greatly benefits from this relationship. It has been stated that a company's average revenue curve is equivalent to the consumer demand curve for the company's product. This indicates that the demand curve is viewed from the perspective of the customer, whereas the AR curve is viewed from the seller's perspective. This indicates that the elasticity of the demand curve and the elasticity of demand at any point on the demand curve are the same. Let's take a quick look at these concepts before talking about how AR, MR, and demand elasticity are related to one another.

1. AR is the revenue per unit of output sold. AR is the ratio of TR to total output. Besides, AR is nothing but the price. It can be seen as
   `AR = (TR)/q  TR = Pq`
   `AR = (Pq)/q = P`
2. MR is the difference made to TR by selling one more unit of the commodity. It means
   MR = TR_n − TR_n-1
   MR = TR_n+1 − TR_n
   `MR = (DTR)/(Dq)`
3. Elasticity of demand is the rate at which the quantity demanded changes as the price changes. In the case of point elasticity of demand, the formula is
   Ed at a point on the demand curve = `"Lower segment"/"Upper segment"`
   With the help of the point method, we can study the relationship between AR, MR and elasticity of demand at any level of output. We can study this relationship with the help of a diagram.