Under perfect competition, TR is an upward sloping an straight line starting from the origin and rises at a constant rate, i.e., proportional to increase in output. Here, AR and MR are identical and remain constant.
The relationship among AR, MR and TR in such case can be explained with the help of an imaginary schedule (Table 12.3) and diagram (Fig. 12.6).
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Table 12.3
| Output (Q) | AR or Price | TR = AR x Q | MR |
| l | 5 | 0 | – |
| 2 | 5 | 10 | 5 |
| 3 | 5 | 15 | 5 |
| 4 | 5 | 20 | 5 |
| 5 | 5 | 25 | 5 |
| 6 | 5 | 30 | 5 |
In the above table, we see that AR (or price) remains constant at Rs. 5 irrespective of the quantity sold. The producer can obtain the same price for any quantity placed on the market. Since larger quantities can be sold without the necessity of reducing the price, each additional unit sold adds the same amount received for it to the total revenue of the producer.
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There is no loss of revenue on the previous units. Thus, marginal revenue is identical with average revenue at all quantity levels, i.e. MR=AR. This has been shown in Fig. 12.6. In this figure, both AR and MR curve are parallel to the X- axis and coincide each other.
In this case, TR curve is a straight line curve starting from the origin with same slope Such kind of relationship among AR, MR and TR is found in case of a producer operating in a perfectly competitive market, discussed in next chapter on Pricing under Perfect Competition.
