Monday  June 27, 2022
 AmosWEB means Economics with a Touch of Whimsy!
 RISK POOLING: Combining the uncertainty of individuals into a calculable risk for large groups. For example, you may or may not contract the flu this year. However, if you're thrown in with 99,999 other people, then health-care types who spend their lives measuring the odds of an illness, can predict that 1 percent of the group, or 1,000 people, will get the flu. The uncertainty is that they probably don't know which 1,000 people, they only know the number afflicted. This little bit of information is what makes risk pooling possible. If the cost is \$50 per illness, then an insurance company can insure your 100,000-member group against flu if they collect \$50,000 (\$50 x 1,000 sick people), or 50 cents per person. By agreeing to pay the cost of each sick person in exchange for the 50 cent payments, the insurance company has effectively pooled the risk of the group.

AVERAGE REVENUE CURVE:

A curve that graphically represents the relation between average revenue received by a firm for selling its output and the quantity of output sold. Because average revenue is essentially the price of a good, the average revenue curve is also the demand curve for a firm's output. The average revenue curve for a firm with no market control is horizontal. The average revenue curve for a firm with market control is negatively sloped.
An average revenue curve is the relation between the average revenue a firm receives from production and the quantity of output produced. The average revenue curve reflects the degree of market control held by a firm. For a perfectly competitive firm with no market control, the average revenue curve is a horizontal line. For firms with market control, especially monopoly, the average revenue curve is negatively-sloped.

### Perfect Competition

Perfect competition is a market structure with a large number of small firms, each selling identical goods. Perfectly competitive firms have perfect knowledge and perfect mobility into and out of the market. These conditions mean perfectly competitive firms are price takers, they have no market control and receive the going market price for all output sold.

Average Revenue Curve,
Zucchini Style
A representative average revenue curve for a perfectly competitive firm is displayed in the exhibit to the right. This particular average revenue curve is that for zucchini sales by Phil the zucchini grower, a presumed perfectly competitive firm.

The vertical axis measures average revenue and the horizontal axis measures the quantity of output (pounds of zucchinis). Although quantity on this particular graph stops at 10 pounds of zucchinis, the nature of perfect competition indicates it could easily go higher.

This curve indicates that if Phil sells 1 pound of zucchinis, then his revenue per unit is \$4. However, if he sells 10 pounds, then he also receives \$4 of average revenue. Should he sell 100 pounds, then he moves well beyond the graph, but his average revenue remains at \$4.

The average revenue curve is actually the demand curve for Phil's zucchinis. In fact, in the same way that average revenue is just another term for price, the average revenue curve is just another term for demand curve.

### Monopoly, Oligopoly, and Monopolistic Competition

Monopoly is a market structure with a single firm selling a unique good. As the only firm in the market, monopoly is a price maker and has extensive market control, facing a negatively-sloped demand curve. If a monopoly wants to sell a larger quantity, then it must lower the price.

Average Revenue Curve,
Medicine Style
The average revenue curve for Feet-First Pharmaceutical is displayed in the exhibit to the right. Key to this curve is that Feet-First Pharmaceutical is a monopoly provider of Amblathan-Plus and thus faces a negatively-sloped demand curve. Larger quantities of output are only possible with lower prices.

The vertical axis measures average revenue and the horizontal axis measures the quantity of output (ounces of medicine). Although quantity on this particular graph stops at 12 ounces of medicine, it could go higher.

This curve indicates that if Feet-First Pharmaceutical sells 1 ounce of medicine (at \$10 per ounce), then average revenue is \$10 per ounce. Alternatively, if it sells 10 ounces (at \$5.50 per ounce), then average revenue in is \$5.50 per ounce. Should it sell 12 ounces (at \$4.50 per ounce), then average revenue is \$4.50 per ounce.

For Feet-First Pharmaceutical the average revenue curve is also the demand curve. The curve is negatively sloped, meaning that larger quantities of output result in less average revenue.

Although this average revenue curve, and preceding table of average revenue numbers, is based on the production activity of Feet-First Pharmaceutical, a well-known monopoly firm, they apply to any firm with market control. Monopolistic competition and oligopoly firms that also face negatively-sloped demand curves generate comparable average revenues.

 <= AVERAGE REVENUE AND MARGINAL REVENUE AVERAGE REVENUE CURVE, MONOPOLISTIC COMPETITION =>

Recommended Citation:

AVERAGE REVENUE CURVE, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2022. [Accessed: June 27, 2022].

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