3.3 Revenue and its Nature in Different Markets

Definitions: Total revenue (TR = P × Q); Average revenue (AR = TR/Q = price) — the demand curve is the AR curve; Marginal revenue (MR = ΔTR/ΔQ) — the addition to revenue from one more unit. The two worlds (memorise the pair): 1. Perfectly competitive firm (price taker): sells any amount at the market price — AR = MR = P, a horizontal line. The firm's decision variable is quantity, not price. 2. Firm with market power (monopoly, monopolistic competition): faces a downward- sloping demand (AR) — to sell more it must cut price, on all units; hence MR lies below AR and falls faster (the extra unit's gain is reduced by the price cut on every unit). A seller facing an elastic demand can expand revenue; facing inelastic, only by raising price. Why a law student studies revenue curves: the condition of profit-maximisation — produce where MR = MC — combined with the shape of AR, is what separates competitive pricing (P = MR = MC) from monopoly pricing (P > MR = MC): the markup over cost is the signature of market power, and measuring it is the daily work of competition authorities.