Question

Why is price per unit equal to the average revenue and marginal revenue of a firm under perfect competition?

Answer 1

1. Under perfect competition, the firm is a price taker; it cannot influence the market price and must accept the price determined by market demand and supply.
2. The firm faces a perfectly elastic demand curve (a horizontal line) at the market price. This means it can sell any quantity of output at the given price without affecting that price.
3. As a result, the price per unit remains constant, regardless of the output level.
4. Since all units are sold at the same price:
   • Average Revenue (AR) = `"Total Revenue"/"Quantity = Price"`
   • Marginal Revenue (MR) = Change in Total Revenue from selling one more unit = Price
5. Therefore, at all output levels Price = AR = MR

This is shown in the given figure, where the demand curve is a straight horizontal line showing P = AR = MR, confirming that in perfect competition, all three are equal.