The Relationship Between TR and MR Under Perfect Competition

Oct 13, 2025 by thesweetdesigns.com 101 views

Introduction

In the realm of economics, particularly in the study of microeconomics, the concepts of Total Revenue (TR) and Marginal Revenue (MR) play a crucial role in understanding the behavior of firms under different market structures. One of the most fundamental market structures is perfect competition, where numerous firms produce a homogeneous product, and no single firm has the power to influence the market price. In this article, we will delve into the relationship between TR and MR under perfect competition, exploring the key concepts, formulas, and implications of this relationship.

Understanding TR and MR

Total Revenue (TR)

Total Revenue (TR) is the total amount of money earned by a firm from the sale of its products or services. It is calculated by multiplying the price of the product by the quantity sold. Mathematically, TR can be represented as:

TR = P × Q

Where:

TR = Total Revenue
P = Price of the product
Q = Quantity sold

Marginal Revenue (MR)

Marginal Revenue (MR) is the change in total revenue that occurs when the firm sells one additional unit of its product. It is calculated by dividing the change in total revenue by the change in quantity sold. Mathematically, MR can be represented as:

MR = ΔTR / ΔQ

Where:

MR = Marginal Revenue
ΔTR = Change in Total Revenue
ΔQ = Change in Quantity Sold

The Relationship Between TR and MR Under Perfect Competition

Under perfect competition, the market is characterized by numerous firms producing a homogeneous product, and no single firm has the power to influence the market price. In this market structure, the relationship between TR and MR is as follows:

TR is a straight line: Under perfect competition, the TR curve is a straight line, indicating that the firm earns the same revenue per unit sold, regardless of the quantity sold.
MR is equal to the slope of the TR curve: The MR curve is also a straight line, and its slope is equal to the slope of the TR curve. This means that the change in TR is proportional to the change in quantity sold.
MR is constant: Since the MR curve is a straight line, the MR is constant, indicating that the firm earns the same revenue per additional unit sold, regardless of the quantity sold.

Formulas and Implications

The relationship between TR and MR under perfect competition can be represented by the following formulas:

TR = P × Q
MR = ΔTR / ΔQ = P

The implications of this relationship are as follows:

Firm's revenue is maximized when MR = MC: Under perfect competition, the firm's revenue is maximized when the MR is equal to the Marginal Cost (MC). This is because the firm can produce additional units at a lower cost, and the revenue earned from each additional unit is equal to the cost of producing it.
Firm's output is determined by the intersection of TR and MC: The firm's output is determined by the intersection of the TR and MC curves. This is because the firm produces additional units until the revenue earned from each additional unit is equal to the cost of producing it.

Conclusion

In conclusion, the relationship between TR and MR under perfect competition is a fundamental concept in microeconomics. The TR curve is a straight line, and the MR curve is equal to the slope of the TR curve. The MR is constant, indicating that the firm earns the same revenue per additional unit sold, regardless of the quantity sold. The implications of this relationship are that the firm's revenue is maximized when MR = MC, and the firm's output is determined by the intersection of the TR and MC curves.

Perfect Competition and the Law of Diminishing Marginal Revenue

In perfect competition, the law of diminishing marginal revenue (DMR) states that as the quantity sold increases, the marginal revenue (MR) decreases. This is because the firm's revenue is maximized when the MR is equal to the MC, and as the quantity sold increases, the MC also increases.

The Relationship Between TR and MR Under Monopoly

In contrast to perfect competition, under monopoly, the TR curve is a downward-sloping curve, and the MR curve is also a downward-sloping curve. The MR is not constant, and it decreases as the quantity sold increases.

The Relationship Between TR and MR Under Monopolistic Competition

Under monopolistic competition, the TR curve is a downward-sloping curve, and the MR curve is also a downward-sloping curve. The MR is not constant, and it decreases as the quantity sold increases.

The Relationship Between TR and MR Under Oligopoly

Under oligopoly, the TR curve is a downward-sloping curve, and the MR curve is also a downward-sloping curve. The MR is not constant, and it decreases as the quantity sold increases.

Conclusion

Q1: What is the relationship between TR and MR under perfect competition?

A1: Under perfect competition, the TR curve is a straight line, and the MR curve is equal to the slope of the TR curve. The MR is constant, indicating that the firm earns the same revenue per additional unit sold, regardless of the quantity sold.

Q2: Why is the TR curve a straight line under perfect competition?

A2: The TR curve is a straight line under perfect competition because the firm earns the same revenue per unit sold, regardless of the quantity sold. This is because the market is characterized by numerous firms producing a homogeneous product, and no single firm has the power to influence the market price.

Q3: What is the implication of the MR being constant under perfect competition?

A3: The implication of the MR being constant under perfect competition is that the firm earns the same revenue per additional unit sold, regardless of the quantity sold. This means that the firm's revenue is maximized when the MR is equal to the Marginal Cost (MC).

Q4: How does the relationship between TR and MR under perfect competition affect the firm's output?

A4: The relationship between TR and MR under perfect competition affects the firm's output in that the firm produces additional units until the revenue earned from each additional unit is equal to the cost of producing it. This is because the firm's output is determined by the intersection of the TR and MC curves.

Q5: What is the law of diminishing marginal revenue (DMR) under perfect competition?

A5: The law of diminishing marginal revenue (DMR) under perfect competition states that as the quantity sold increases, the marginal revenue (MR) decreases. This is because the firm's revenue is maximized when the MR is equal to the MC, and as the quantity sold increases, the MC also increases.

Q6: How does the relationship between TR and MR under perfect competition differ from that under monopoly?

A6: The relationship between TR and MR under perfect competition differs from that under monopoly in that the TR curve is a straight line under perfect competition, while it is a downward-sloping curve under monopoly. The MR curve is also a straight line under perfect competition, while it is a downward-sloping curve under monopoly.

Q7: How does the relationship between TR and MR under perfect competition differ from that under monopolistic competition?

A7: The relationship between TR and MR under perfect competition differs from that under monopolistic competition in that the TR curve is a straight line under perfect competition, while it is a downward-sloping curve under monopolistic competition. The MR curve is also a straight line under perfect competition, while it is a downward-sloping curve under monopolistic competition.

Q8: How does the relationship between TR and MR under perfect competition differ from that under oligopoly?

A8: The relationship between TR and MR under perfect competition differs from that under oligopoly in that the TR curve is a straight line under perfect competition, while it is a downward-sloping curve under oligopoly. The MR curve is also a straight line under perfect competition, while it is a downward-sloping curve under oligopoly.