Question

Hello?I have a question about the relationship between price(P) and average total revenue(ATR). Dose P=ATR in any condition? Or just in perfectly competitive market? And why? Dose it happen in the short run in perfectly competitive market or just in the long run? And why?

Thank you very much.

Answer 1

Average total revenue is total revenue divided by quantity. In perfectly competitive market, total revenue is P*Q where P is fixed. In that sense, ATR becomes P*Q/Q = P. Since P is fixed, ATR is also fixed. Hence P = ATR

In imperfect markets, P = A - BQ and is variable. This implies that TR = PQ = AQ - BQ^2 and therefore, ATR = TR/Q = P = A - BQ. This implies that whether it is a perfectly competitive market or an imperfect market price is always equal to average revenue. This is is the reason why average revenue is the inverse demand function.

This fact has nothing to do with the term / short run or long run because it is a demand concept and not a cost concept. Costs are different in short run and long run due to variability of factors. But demand function remains same in either case.