(a) Under Perfect Competition MR = AR
Simply put, under perfect competition MR = AR because all goods are sold at a single (i.e. same price) price in the market. We know that under perfect competition, industry is the price maker and the firm the price taker (See Q. 4.4). Every firm has to accept the price as given (determined) by the industry (i.e. the firm is only quantity adjuster). At this price, a firm can sell any amount of its product it likes to sell. What will be its result? Clearly with sale of every additional unit of the product, additional revenue (i.e. MR) and average revenue (AR) will become equal to Price. Hence both AR and MR will be equal to each other. Thus MR = AR in perfect competition.
(b) Under Monopoly (MR < AR)
The reason is that in monopoly more units of a commodity can be sold by reducing the price of the commodity. It means as sale increases, AR falls. We know that decreasing AR (price) implies decreasing MR. [See relationship between AR and MR in Q. 3.26(a)]. MR declines at a faster rate than AR. As a result MR from successive units sold becomes lower than the price or AR. Hence under monopoly MR is less than AR. That is why graphically MR curve is below AR curve as shown in Fig. 4.2,
Fig. 4.2
Briefly put, in perfect competition AR = MR as all units of the product are sold at a single (i.e., same) price. In monopoly AR > MR as more units of the product are sold by reducing the price.
