The average revenue (AR) of a firm is defined as total revenue per unit of output. The marginal revenue (MR) of a firm is defined as the increase in total revenue for a unit increase in the firm’s output

1. Both AC and MC are derived from total cost (TC). AC refers to TC per unit of output and MC refers to addition to TC when one more unit of output is produced.

2. Both AC and MC curves are U-shaped due to the Law of Variable Proportions. The relationship between the two can be better illustrated through following schedule and diagram.

Relationship between AC and MC:
1. When MC is less than AC, AC falls with increase in the output, i.e. till 3 units of output.
2. When MC is equal to AC, i.e. when MC and AC curves intersect each other at point A, AC is constant and at its minimum point.
3. When MC is more than AC, AC rises with increase in output.
4. Thereafter, both AC and MC rise, but MC increases at a faster rate as compared to AC.
As a result, MC curve is steeper as compared to AC curve.

Oligopoly in a commodity market occurs when there are a small number of firms producing a homogenous commodity. There are two types of oligopoly, collusive and non-collusive. Oligopoly market structure consists of only a few firms. The firms under such a market structure experience a high degree of mutual interdependence. Firms are interdependent because each firm takes in to consideration the likely reactions of its rival firms when deciding its output and price policy.  It makes a firm dependent on other firms. The firm may have to reconsider the change in the light of the likely reactions. The price and output policy of a firm affects the policies and profit of another firm. This is because when one firm lowers (rises) its prices, the rival firms may or may not follow suit. This makes the demand curve under the oligopoly market structure indeterminate, thereby makes the firms mutually interdependent in an oligopoly market.

When a firm can sell more only by lowering the price the AR curve is downward sloping. When AR is falling, MR must be less than AR. Therefore, MR curve lies below the AR curve.

Perfect oligopoly is the form of oligopoly in which each firm produces homogeneous products. Here all products are perfectly substitutable. So, it can be also called as pure oligopoly. For example, cement industry or chemical industry.

An oligopoly is a market structure in which a few firms dominate. When a market is shared between a few firms, it is said to be highly concentrated. One of the main characteristics of oligopoly market is interdependence. Firms that are interdependent cannot act independently of each other. A firm operating in a market with just a few competitors must take the potential reaction of its closest rivals into account when making its own decisions. For example, if a petrol retailer wishes to increase its market share by reducing price, it must take into account the possibility that close rivals may reduce their price in retaliation. Firms that are interdependent cannot act independently of each other. A firm operating in a market with just a few competitors must take the potential reaction of its closest rivals into account when making its own decisions.