Average Revenue

AR=TR (Total Revenue) / Q (Quantity) = Price

Average Revenue is the price per unit to the purchaser or the revenue per unit. In perfect competition, Price is the same thing as Average Revenue. This is because price is perfectly inelastic. Because price never changes the average revenue will always be equal to the price. In perfect competition Average Revenue is also equal to Marginal Revenue. This is, again, because price is perfectly inelastic.

The average revenue curve for a buisness is the same as their demand curve in a perfectly competitive market.
The quantity produced is going to be at the intersection of the AR (Average Revenue) curve and the MC (Marginal Cost) curve. We use this intersection to find the profit or loss for the firm. Extend Q* and see where it intersects ATC and AVC. The picture below illustrates this. In the long run, extend the line from the supply and demand curve graph (where the supply and demand intersect) across to the "firm" graph to get the AR/MR/P line.

external image profit.gif


Video: Revenue Curves for Firms

Sample Question:

If the total revenue is $100 and the Quantity is 10, what is the average revenue?

ANSWER: $10 because $100/10 = $10 (See the equation for Average Revenue listed at the top of the page).