Difference Between AR and MR in Economics

Understanding the difference between Average Revenue (AR) and Marginal Revenue (MR) is crucial in economics, as they both play significant roles in determining pricing strategies, production levels, and overall profitability. In this article, we will delve into the nuances of AR and MR, their calculations, and their implications for businesses and economists alike.

What is Average Revenue (AR)?

Average Revenue (AR) is the total revenue generated from the sale of goods or services divided by the quantity of goods or services sold. It is a measure of the average amount of money received per unit of output. The formula for AR is as follows:

AR is an essential metric for businesses, as it helps them understand the average price at which they are selling their products or services. It is also used to calculate other important economic concepts, such as profit margins and elasticity.

What is Marginal Revenue (MR)?

Marginal Revenue (MR) is the additional revenue generated from selling one more unit of a good or service. It is a measure of the change in total revenue when the quantity sold increases by one unit. The formula for MR is as follows:

Marginal Revenue is particularly important for businesses that operate in competitive markets, as it helps them determine the optimal production level and pricing strategy. By analyzing MR, businesses can make informed decisions about whether to increase or decrease production and adjust their prices accordingly.

Calculating AR and MR

Let’s consider a hypothetical scenario to illustrate how to calculate AR and MR. Suppose a company sells 100 units of a product at a price of $10 per unit. The total revenue generated from these sales is $1,000 (100 units $10). To calculate AR, we divide the total revenue by the quantity sold:

Now, let’s say the company decides to sell one more unit at the same price. The total revenue increases to $1,050 (101 units $10). To calculate MR, we find the change in total revenue and divide it by the change in quantity sold:

Implications of AR and MR

Understanding the relationship between AR and MR is crucial for businesses and economists. Here are some key implications:

• AR is a useful indicator of the average price at which a product or service is sold. It helps businesses assess their pricing strategies and make adjustments if necessary.

• MR is essential for determining the optimal production level and pricing strategy. By analyzing MR, businesses can make informed decisions about whether to increase or decrease production.

• In competitive markets, MR is particularly important, as it helps businesses understand the impact of their pricing decisions on total revenue.

• AR and MR are closely related to the concept of elasticity. If a product is highly elastic, a small change in price will lead to a significant change in quantity demanded