Relationship Between AR and MR: Concepts, Curves & Revenue

A general relationship between AR and MR is as follows: (1) Whenever AR is falling (sloping downwards), MR is always below AR (MR < AR) (2) If AR is constant, AR = MR (under perfect competition. The marginal revenue (MR) and average revenue (AR) relationship explains how the revenues of a company change when additional units are sold. Average Revenue (AR) is the amount of money a company receives per unit sold of a given product, and Marginal Revenue (MR) is the additional amount received when an extra unit is sold. In a perfectly competitive market, MR and AR are equal since companies sell goods at the same price. In a monopoly or imperfect market, MR < AR since companies need to reduce prices in order to sell more. This helps companies determine how much to produce and at what price. This article explores the relationship between AR and MR using diagrams, formulas, and market structure comparisons

Relationship Between AR and MR is a vital topic to be studied for the commerce related exams such as the UGC-NET Commerce Examination.

In this article, learners will be able to know about the following:

• Introduction to AR and MR
• Relationship Between AR and MR
• Clear Definitions and Formulas: AR & MR

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Introduction to AR and MR

Average Revenue (AR) and Marginal Revenue (MR) are essential business and economics concepts. Average Revenue (AR) is the revenue an enterprise makes per product unit sold, which often equals the selling price. Marginal Revenue (MR) is the additional revenue a company makes by selling one additional unit of a product. In certain markets, AR and MR are equal, but in others, MR decreases as more products are being sold. It is best to understand AR and MR to enable businesses to determine how much to sell and at what cost to maximize profit.

Fig: relationship between ar and mr

The relationship between AR, MR, and elasticity of demand helps determine whether a firm earns more or less by lowering prices. The Average Revenue (AR) and Marginal Revenue (MR) relationship assists companies in knowing how their profits are affected when they produce more products. In a perfect market, AR and MR are the same, but in an imperfect market, MR is less than AR since prices go down as more products are produced.

Perfect Competition

The relationship between AR and MR varies across market types and affects pricing and revenue outcomes. With perfectly competitive markets, several sellers have the same commodity being sold for a set price. Because businesses do not have the ability to adjust the price, AR equals MR because the additional unit that is sold translates to the same amount of money. For instance, if one apple seller has apples for $2 each, any apple that is sold represents $2 revenue, and this implies AR = MR. In essence, companies are able to sell as many as they like without adjusting prices.The relationship between AR and MR under perfect competition is straightforward—both remain equal at all output levels

Monopoly Market

In monopolies, the relationship between AR, MR, and elasticity of demand is crucial—MR becomes negative when demand turns inelastic. In a monopoly, a single business dominates the whole market and determines its price. In order to sell more, the company has to decrease the price, so MR becomes less than AR. For instance, if a toy firm sells 10 toys at $5 each but has to decrease the price to $4.50 in order to sell 11 toys, the additional toy earns less revenue. This is due to the fact that the company cannot sell more at the existing price.

Monopolistic Competition

In monopolistic competition, numerous companies sell similar yet different products. In this, MR is also lower than AR, as in a monopoly, since companies adjust prices to capture customers. Suppose two bakeries sell cupcakes. One may decrease its price in order to sell more, but that implies reduced revenue per additional cupcake sold. Companies have to make judicious decisions on their prices in order to gain maximum profits.

Oligopoly Market

In an oligopoly, a few large companies control the market and watch each other’s pricing. AR and MR depend on how these businesses react to price changes. If one company lowers prices, others may follow, reducing MR. For example, if three car companies compete, one might lower its prices, forcing the others to do the same, making MR lower than AR.

Clear Definitions and Formulas: AR & MR

By calculating MR and analyzing demand elasticity, firms understand the relationship between AR, MR, and elasticity of demand for strategic pricing. Understanding the relationship between Average Revenue (AR) and Marginal Revenue (MR) begins with their mathematical definitions. These formulas help analyze pricing strategies, output decisions, and revenue optimization in different market scenarios.

Average Revenue (AR) Formula

Formula: AR= Total Revenue (TR)/ Quantity (Q)

• Average Revenue is the revenue a firm earns per unit of output sold. It is also known as Price under most circumstances.
  • If a firm sells 100 units of a product and earns ₹5,000, then:
    AR= 5000/ 100 =Rs.50
• In Perfect Competition:
  • Since the price remains constant, AR stays the same for each unit sold.
  • Therefore, AR = Price = MR

 Marginal Revenue (MR) Formula

Formula: MR=ΔTR/ ΔQ

• Explanation: Marginal Revenue refers to the additional revenue generated when one extra unit is sold.
  • Example: If selling 10 units earns ₹1,000 and selling 11 earns ₹1,080,
    MR= (1080-1000) / (11-10) =Rs. 80
• In Imperfect Markets:
  • The firm must reduce prices to sell more, which decreases the MR.
  • Hence, MR < AR in Monopoly, Monopolistic Competition, and Oligopoly.

Conclusion

Mastering the relationship between AR and MR equips students with critical knowledge for UGC NET and practical economic decision-making. Augmented Reality (AR) and Mixed Reality (MR) are alike in the sense that both superimpose digital objects over the real world, but MR is more sophisticated. AR overlays digital images or data over what we see, such as a phone camera filter. MR extends this by enabling digital objects to have an effect on real things, making them even more realistic and palpable. Both of the technologies are helpful in learning, gaming, and even in medicine since they make things interactive and enjoyable. The more that technology develops, the larger the roles that AR and MR will play in our daily life.

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Major Takeaways for UGC NET Aspirants Introduction to AR and MR: Average Revenue (AR) refers to the revenue per unit sold, while Marginal Revenue (MR) is the revenue generated by selling an additional unit. A basic understanding of both concepts can assist a firm in determining optimal output and pricing strategies toward profit generation.  Relationship Between AR and MR: AR and MR are the same in perfect competition; otherwise, in some imperfect markets and monopolistic situations, MR is less than AR due to a price cut that should be given to sell more. Correlating with revenue concepts is thus another avenue for evaluating how firms behave in different market structures. Clear Definitions and Formulas: AR & MR: The formulas AR = TR ÷ Q and MR = ΔTR ÷ ΔQ show essential avenues to revenue changes with output. Customarily, these terms are applied in the computation of numerical problems and evaluation of elasticity, pricing, and output decisions in the commerce exams.

Relationship Between AR and MR Previous Year Questions

In a perfectly competitive market, the relationship between AR and MR is:

1. A) AR > MR
   B) AR < MR
   C) AR = MR
   D) AR is unrelated to MR

Answer: C) AR = MR