Explain the relationship between AR and MR under perfect competition with the help of a schedule and a diagram.

Under perfect competition, marginal revenue remains equivalent to average revenue as all goods tend to be sold at the same price in the market, whereby industry represents the price maker while firm represents the price taker. With sale of every extra unit of the product, extra revenue or marginal revenue as well as the average revenue will turn equal to the price.

A hypothetical schedule for the relationship occurring between marginal revenue as well as average revenue is provided below, whereby a firm selling a certain agricultural product resides in a perfectly competitive market (like wheat) at price of INR 3 per tonne. As the price remains fixed, every unit sold brings in average revenue of INR 3 for every tonne that is sold. Furthermore, since the value of firm’s output does not considerably influence the price at which the output is sold, marginal revenue remains equivalent to average revenue.

Here, TR = Total Revenue
AR = Average Revenue
MR = Marginal Revenue

The relationship, thus, occurring between marginal revenue as well as average revenue can be exhibited in the following diagram: