explain the relationship between TR and MR when
1) the firm can sell more at the same price
2) the firm can sell more only by lowering its price
(i) Only under perfect competition, a firm can sell more at the same price. This is because under perfect competition, an individual firm faces a horizontal demand curve for its product. The same demand curve represents AR and MR curve. Thus, a perfectly competitive firm can sell whatever quantity it wishes to sell at the same price. Under such conditions, the relationship between TR and MR(equal to AR) is:
- Under perfect competition market, AR equals MR throughout all output levels.
- TR curve is a linear positively sloped line from the origin.
- The increase in TR is in the same proportion as the increase in the output sold.
- MR curve is a straight horizontal line parallel to the x-axis and coincides with the AR curve.
(ii) On the other hand, under imperfect competition market structure (whether monopoly, monopolistic or oligopolistic market), a firm faces a downward sloping demand curve and has different AR and MR curves. So,under imperfect competition, AR and MR are two different curves and are both sloping downwards with MR being more elastic than AR. Thus, a firm under imperfect market can sell more only by lowering its price. This brings out the relationship between TR and MR as
- When TR curve is increasing at diminishing rate, MR curve is falling but remains positive.
- When TR curve attains its maximum point 'K', MR curve touches the x-axis and becomes zero.
- When TR curve starts falling, MR curve becomes negative.
- When TR curve touches the x-axis and becomes zero, the MR curve is negative.