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August 14, 2020 

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MARGINAL UTILITY AND DEMAND: An explanation of the law of demand and the negatively-sloped demand curve can be found in the analysis of marginal utility and especially the law of diminishing marginal utility. This explanation rests on two propositions. One, the law of diminishing marginal utility means that the marginal utility obtained from consuming a good declines as the quantity consumed increases. Two, the marginal utility of a good underlies the demand price that buyers are willing and able to pay for a good. When combined, these two propositions indicate that the demand price buyers are willing and able to pay for a good declines as the quantity demanded (and consumed) increases. And this is the law of demand.

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AVERAGE REVENUE CURVE, PERFECT COMPETITION:

A curve that graphically represents the relation between average revenue received by a perfectly competitive 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 perfectly competitive firm's output.
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.

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.

Average Revenue Curve,
Zucchini Style
Average Revenue Curve, Perfect Competition
Average revenue is commonly represented by an average revenue curve, such as the one 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.

<= AVERAGE REVENUE CURVE, MONOPOLYAVERAGE REVENUE, MONOPOLISTIC COMPETITION =>


Recommended Citation:

AVERAGE REVENUE CURVE, PERFECT COMPETITION, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2020. [Accessed: August 14, 2020].


Check Out These Related Terms...

     | average revenue | average revenue, perfect competition | average revenue curve, monopoly | average revenue curve, monopolistic competition | total revenue curve, perfect competition | marginal revenue curve, perfect competition | average total cost curve | average product curve |


Or For A Little Background...

     | price | market structures | perfect competition | perfect competition, characteristics | perfect competition, demand | monopoly | oligopoly | monopolistic competition | demand | demand price | law of demand |


And For Further Study...

     | short-run production analysis | short-run analysis, perfect competition | long-run analysis, perfect competition | perfect competition, efficiency | perfect competition, breakeven output | perfect competition, profit analysis | short-run production alternatives, perfect competition | perfect competition, profit maximization |


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