Relationship between AR and MR || Production and cost || Bcis Notes

The relationship between AR and MR are explained below:-

The relationship between AR and MR can be explained in terms of the perfect market and imperfect market. They are explained below:-

1. Perfect market- Perfect competition is a concept in microeconomics that describes a market structure controlled entirely by market forces. In this situation, the firm has to accept the same price as determined by the industry. It means any quantity of a commodity can be sold at that particular price. Since firms are price taker, AR and MR curve is a horizontal straight line with the x-axis.

2. Imperfect market – Since firms are price maker, so the price is determined by firms itself. Due to which the AR and MR curve may:-

a) The decrease in constant rate

Here, the MR curve passes through the mid-point of the line from AR to the y-axis. i.e. ab=bc

b) The decrease in decreasing rate

Here, MR curve passes through the left of mid-point of the line from AR to the y-axis, i.e. ab<bc

c) The decrease in an increasing rate

Here, MR curve passes through the right of mid-point of the line from AR to y-axis i.e. ab>bc

The relationship between AR and MR has been explained above.

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