Understanding the Relationship Between TR, AR, and MR Under Monopoly Market
When delving into the intricacies of a monopoly market, it’s crucial to comprehend the interplay between Total Revenue (TR), Average Revenue (AR), and Marginal Revenue (MR). These three economic concepts are pivotal in analyzing the pricing and production decisions of a monopolist. By unraveling their relationship, you’ll gain a deeper insight into how a monopolist operates and maximizes profits. Let’s explore this relationship in detail.
What is Total Revenue (TR)?
Total Revenue (TR) is the total amount of money a monopolist earns from selling a certain quantity of goods or services. It is calculated by multiplying the price of the product by the quantity sold. In a monopoly market, TR is a crucial indicator of the monopolist’s financial performance. The formula for TR is as follows:
TR = Price 脳 Quantity
Understanding Average Revenue (AR)
Average Revenue (AR) is the revenue generated per unit of output sold. It is calculated by dividing the Total Revenue (TR) by the quantity of goods or services sold. In a monopoly market, AR is often equal to the price of the product, as the monopolist is the sole seller and has control over the market. The formula for AR is as follows:
AR = TR / Quantity
Deciphering Marginal Revenue (MR)
Marginal Revenue (MR) is the additional revenue a monopolist earns from selling one more unit of a good or service. It is calculated by taking the change in Total Revenue (TR) and dividing it by the change in quantity sold. In a monopoly market, MR is often less than the price of the product, as the monopolist has to lower the price to sell more units. The formula for MR is as follows:
MR = 螖TR / 螖Quantity
The Relationship Between TR, AR, and MR
Now that we have a clear understanding of TR, AR, and MR, let’s explore their relationship under a monopoly market.
1. Total Revenue (TR) and Average Revenue (AR):
In a monopoly market, AR is often equal to the price of the product. Therefore, as the monopolist increases the quantity of goods or services sold, TR will increase proportionally. This is because the price remains constant, and the increase in quantity sold leads to a direct increase in TR. The table below illustrates this relationship:
| Quantity Sold | Price | Total Revenue (TR) | Average Revenue (AR) |
|---|---|---|---|
| 1 | $10 | $10 | $10 |
| 2 | $10 | $20 | $10 |
| 3 | $10 | $30 | $10 |
| 4 | $10 | $40 | $10 |
2. Total Revenue (TR) and Marginal Revenue (MR):
In a monopoly market, MR is often less than the price of the product. This is because the monopolist has to lower the price to sell more units. As a result, the increase in TR from selling one more unit is less than the price of the product. The table below illustrates this relationship:
| Quantity Sold | Price | Total Revenue (TR) | Marginal Revenue (MR) |
|---|---|---|---|
| 1 | $10 | $10 | $0 |
| 2 | $9 | $18 | $8 |
