Difference between average revenue and marginal revenue?

Answer 1

"Average revenue", for a specific level of sales, is the total revenue divided by the number of units sold, or in other words, revenue per unit, or, simply, "price". This average is over the entire sales in a given time period, market, etc. "Marginal revenue" is "average revenue" evaluated at every possible level of sales. You see, the more you sell, the lower the price will be, according to the law of demand. If you sell 1,000 widgets, you may get $1 apiece for them, but if you sell 10,000 of them, you may have to lower the price to 90 cents to sell them all. Of course, if the market is perfectly competitive (you have lots of competitors selling widgets), then you alone can't affect the price very much with your change in output, and the Marginal Revenue is, essentially, constant, at least over the relevant range of level of sales. However, even in perfect competition, you could, theoretically, increase your sales so much that you dominate all of your competitors, and then you would have to lower your price to sell all of your widgets. The thing is, under perfect competition, everyone is operating exactly at the level of sales where marginal cost is equal to marginal revenue, so if your marginal revenue goes down, your marginal profit becomes negative. So you won't do that. In fact, this concept of marginal revenue (when compared to marginal cost) is exactly the mechanism that ensures you don't try to dominate a perfectly competitive market. (If the market is a monopoly, or oligopoly, however, all bets are off. For that matter, even if a market is otherwise perfectly competitive (large number of firms) but entry and exit are not free (say, large start-up costs), a firm with deep enough pockets can put everyone else out of business by over-producing for a while and driving the price down to where all firms are losing money, then raise the price back up, to even above the previous price, once it becomes a monopoly.)