How are market price, average revenue, and marginal revenue related?
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How are market price, average revenue, and marginal revenue related?
I think market price i.e the price for the good on the market is the same as the average revenue that the firm receives for that good, i.e. if the total revenue for 8 units sold was £160 then the average revenue for that good is 160/ 8 = £20. This is the average revenue for each unit and hence the market price for each unit, since items are usually sold for the same price (before the company which produces the good sends it out to the retail outlets who, having bought it in bulk, mark up the price).
Marginal revenue is used to show how much more revenue would be made when considering the eventual rising cost of each additional unit produced. Essentially marginal revenue (MR) will fall as Marginal cost (MC- the extra cost of producing each extra unit/good) rises. This is how the company knows when to stop producing goods to sell, i.e when their marginal revenue is equal to their marginal cost.
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