Mostly summarized from Gregory Mankiw’s Principles of Economics, 5th Ed.
PART 5 Firm Behavior and the Organization of Industry
Chapter 14 of 36
Firms In Competitive Markets
Section 5 of 24
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Table 1 here
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For Vaca Farm, per Table 1
· Column 4 Average Revenue (AR) is how much revenue the farm receives from a gallon (unit) of milk
· Column 5 Marginal Revenue (MR) is how much additional revenue the farm receives if it increases production of milk by 1 gallon
AR = Total Revenue (TR) divided by the Quantity (Q) of output.
AR is how much revenue a firm receives for the typical unit sold.
AR always equals $6, the constant market-given Price (P) of a gallon of milk.
MR also always equals $6.
This result shows a situation that applies only to competitive firms
· P is given and constant for a competitive firm
· when Q rises by 1 unit, TR rises by constant P dollars
· MR = P = AR
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