Lecture 5

Revenue Curves and Firm

Equilibrium

Revenue Curves of an
Individual Firm Under Perfect
Competition
In perfect competition the number of buyers and sellers
in the market is very large.

In this situation no single buyer or seller is in a position

to influence the price with his individual action as each
firm and each buyer represents a very small part of the
market.
Under perfect competition individual actions of the firms
and buyers have no influence on the price.
A firm can not influence price if it decides to produce
more or less or no amount of the product. Similarly a
buyer can not influence the price if he decides to buy
more or less or no amount of the product.

Revenue Curves of an
Individual Firm Under Perfect
Competition
Under perfect competition each firm can sell at the
prevailing prices whatever amount it wants to sell.

It is not in the firms interest to sell its product at a price

lower than the prevailing price because the product is
homogeneous and the firm will not be able to increase its
sales.
Under perfect competition a firm can not charge a price
higher than the prevailing price for its product because if
it attempts to do so, it will lose all of its customers.
Therefore, under perfectly competitive situation the firm
faces for its product a perfectly elastic demand curve at
the price prevailing in the market.

Price
Prevailing
in the
Market
(Rs)

Units Sold

Total
Revenue
(TR)
(Rs)

Average
Revenue
(AR)
(Rs)

Marginal
Revenue
(MR)
(Rs)

10

10

10

10

10

20

10

10

10

30

10

10

10

40

10

10

10

50

10

10

Explanation

The demand is also the average revenue and the marginal revenue
curve of the firm because of being perfectly elastic.

It means that the demand curve faced by a perfectly competitive

firm is also its AR and MR curve and it is a horizontal line parallel to
the horizontal axis.

This curve also shows that when average revenue remains the same,
the marginal revenue also remains the same and the AR and MR
curves lie on each other and they can not be separated from each
other.

Also, the TR curve of a perfectly competitive firm will be a straight

line which indicates that with the increase in sales the total revenue
of the firm rises at a constant rate.

Under perfect competition a firm has to accept the price determine in

the market by the forces of market demand and supply.

ASSIGNMENT

FIRM EQUILIBRIUM BOTH IN

THE SHORT RUN AND LONG
RUN