Introduction

The following table indicates the total revenue, average revenue and marginal revenue for Funky Chicken:

Total revenue, average revenue and marginal revenue

Quantity

Q

 Price
P

(rand)

 Total revenue

TR

(rand)

 Marginal revenue

MR

(rand)

 Average revenue

AR

(rand)
  R4 - --- ---
1 R4 4 4 4
2 R4 8 4 4
3 R4 12 4 4
4 R4 16 4 4
5 R4 20 4 4

The market price for a fried chicken piece is R4 and this is indicated in column 2. Note that the market price does not change as the quantity changes, since the firm under perfect competition is a price taker. The total revenue is equal to the price (column 2) times the quantity (column 1) and is indicated in column 3. The marginal revenue is the revenue from selling an additional unit and is provided in column 4. Since the quantity is given for intervals of one, the marginal revenue for the fourth unit can be calculated as follows: total revenue for four units minus total revenue for three units = R16 – R12 = R4.

The interesting thing to note about the marginal revenue is that it is a constant R4 and equal to the price of R4. In other words, the marginal revenue does not change as the firm produces more output and is equal to the price. Think of it in this way: If the price at which a firm can sell its product is given, then the marginal revenue (the additional revenue the firm obtains by selling an additional unit) is also equal to the price that the firm can obtain for that additional unit. Funky Chicken is a price taker and is too small to influence the market price by supplying more. So, every time Funky Chicken sells one more fried chicken piece, its revenue increases by exactly the same amount as the market price of R4.

Average revenue, which is indicated in column 5, is calculated by dividing the total revenue (column 3) by the quantity (column 1). It is also constant and equal to the market price of R4.

From the above table, we can see that price (P) = marginal revenue (MR) = average revenue (AR). The demand curve facing the individual firm under perfect competition is therefore also the marginal revenue curve and the average revenue curve.

Total revenue is indicated by the area under the individual demand curve (P x Q).

Activity

Now do the following activity to see if you understand the difference between total revenue, marginal revenue and average revenue:

Study the following diagram of the market for cold drinks and individual demand facing Spar Cold-drinks in the market for cold drinks and then answer the following questions:

a. Use the data in the diagram to complete the following table.

Quantity

Q

 Price

P

(rand)

 Total revenue

TR

(rand)

 Marginal revenue

MR

(rand)

 Average revenue

AR

(rand)
1
2
3
4
5
6

b. If the market equilibrium price increases to R12, then marginal revenue for each output level will be ______.

c. If the market equilibrium price increases to R12, then average revenue for each output level will be ____.

Click to Show Answer

a.

Quantity

Q

 Price

P

(rand)

 Total revenue

TR

(rand)

 Marginal revenue

MR

(rand)

 Average revenue

AR

(rand)
1 10 10 10 10
2 10 20 10 10
3 10 30 10 10
4 10 40 10 10
5 10 50 10 10
6 10 60 10 10

b. R12. By selling an additional unit, their total revenue increases by R12.

c. R12. The price is R12, and their average revenue is also R12.

For Spar Cold-drinks, the price (P) = marginal revenue (MR) = average revenue (AR). The demand curve facing Spar Cold-drinks under perfect competition is therefore also the marginal revenue curve and the average revenue curve.

You should indeed agree, because for Spar Cold-drinks the price (P) = marginal revenue (MR) = average revenue (AR). The demand curve facing Spar Cold-drinks under perfect competition is therefore also the marginal revenue curve and the average revenue curve.

You should agree, because for Spar Cold-drinks the price (P) = marginal revenue (MR) = average revenue (AR). The demand curve facing Spar Cold-drinks under perfect competition is therefore also the marginal revenue curve and the average revenue curve.