The Theory of the Firm under Perfect Competition | Class 12 Economics Notes

4.2 REVENUE

In a perfectly competitive market, a firm is a price taker and sells its output at the market price p. Since the firm can sell any quantity at this price, it has no incentive to set a price lower than p. The firm's total revenue (TR) is the product of the market price and the quantity of output sold, expressed as TR = p × q, where q is the quantity produced and sold. For example, if the market price of a box of candles is Rs 10, then selling 1 box yields TR = 1 × 10 = Rs 10, selling 2 boxes yields TR = 2 × 10 = Rs 20, and so on. The total revenue curve plots the relationship between quantity sold (x-axis) and total revenue (y-axis). Since price is constant, the TR curve is a straight line passing through the origin with slope equal to p. The average revenue (AR) is total revenue per unit of output, AR = TR/q = p, which means AR equals the market price. The marginal revenue (MR) is the additional revenue from selling one more unit, calculated as the change in TR divided by the change in quantity. For a perfectly competitive firm, MR also equals the market price p, because each additional unit is sold at price p. Hence, for a price-taking firm, MR = AR = p. The firm's demand curve is perfectly elastic, represented by a horizontal line at price p, indicating the firm can sell any quantity at that price.

📊 Diagram: See figure_3: Fig. 4.1 Total Revenue curve showing TR increasing linearly with output; figure_4: Fig. 4.2 Price Line showing horizontal AR curve at market price p.

🧪 Activity: No specific activity in this section.

🔗 Connection: Leads to the analysis of profit maximisation conditions in section 4.3.

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