Why is the total revenue curve of a price-taking firm an upward-sloping straight line? Why does the curve pass through the origin?
Total revenue is defined as the total sale proceeds of a producer by selling corresponding level of output therefore total revenue can be defined as the total sales proceed of the seller by selling the number of units at a given price.
In a perfectly competitive market the firm is a price taker so it can't influence the price hence it can change its total revenue by changing the quantity of output sold.
The total revenue curve of a price taking firm is upward sloping straight line because in perfectly competitive market the firm is a price taker and so the price or average revenue is constant. Due to this the total revenue increases proportionately with increase in the quantity of output sold. Total revenue curve passes through origin because if quantity of output sold is zero then total revenue will also be zero.
In a perfectly competitive market, a price-taking firm faces a horizontal demand curve at the market price. As a result, the firm can sell any quantity of output at that given price without affecting the market price itself. This situation leads to a constant price or average revenue for the firm, creating an essential dynamic for understanding the total revenue curve.
The total revenue curve for a price-taking firm is a linear, upward-sloping line that passes through the origin. This phenomenon can be explained by fundamental economic principles:
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Price Taking and Constant Average Revenue: In a perfectly competitive market, the firm is a price taker. It must accept the market price for its output, regardless of the quantity it sells. Consequently, the price remains constant or uniform (i.e., constant average revenue).
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Relationship between Total Revenue and Quantity Sold: Total revenue is the product of the quantity of output sold and the price at which it is sold. Since the firm cannot influence the price, any increase in the quantity sold leads to a proportional increase in total revenue.
Mathematically, Total Revenue (TR) = Price (P) × Quantity (Q). As the quantity sold increases, the total revenue also increases proportionately.
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Passing Through the Origin: When no output is sold (i.e., quantity sold is zero), the total revenue is also zero. This aligns with the basic principle that no sales result in no revenue. Therefore, the total revenue curve starts at the origin.
This understanding is crucial to grasp the behavior of firms operating in a perfectly competitive market. The linear, upward-sloping total revenue curve signifies the direct relationship between the quantity of output sold and the total revenue generated under conditions where the firm has no control over the market price.
FAQs
For a price-taking firm, AR is constant. In case AR is constant, MR is also constant which implies that TR increases at a constant, positive rate. Hence, TR forms a straight line sloping upward. It passes through the point of origin simply because TR is zero when output is zero.
Why the total revenue curve of a firm in perfect competition is a straight line? ›
A total revenue curve is a straight line coming out of the origin. The slope of a total revenue curve is MR; it equals the market price (P) and AR in perfect competition. Marginal revenue and average revenue are thus a single horizontal line at the market price, as shown in Panel (b).
What is the upward sloping total revenue curve? ›
The total revenue and average revenue curves are always upward sloping because they are derived from the demand curve, which slopes downward. The demand curve shows the relationship between the price of a good and the quantity of that good that consumers are willing and able to buy.
Does the curve pass through origin? ›
Through any point (x,y) of a curve which passes through the origin, lines are drawn parallel to the coordiante axes. The curve, given that it divides the rectangle formed by the two lines and the axes into two areas, one of which is twice the other, represents a family of. circles. hyperbolas.
What is the slope of the revenue curve? ›
The slope of a total revenue (TR) curve is determined by the price elasticity of demand (PED) for a product. Price elasticity of demand measures how responsive the quantity demanded of a good is to changes in its price.
Why is there an upward sloping marginal cost curve? ›
The marginal cost curve is generally upward-sloping, because diminishing marginal returns implies that additional units are more costly to produce. A small range of increasing marginal returns can be seen in the figure as a dip in the marginal cost curve before it starts rising.
Is the average revenue curve shaped as a vertical straight line in a perfect competition? ›
Answer and Explanation:
This means that the average revenue in perfect competition is a horizontal line, which is parallel to the x-axis. Average revenue in perfect competition is not parallel to the y-axis. The average revenue in perfect competition does not slope downwards.
In which market does the total revenue curve rise upward right? ›
Total revenue for a perfectly competitive firm is an upward sloping straight line. The slope is equal to the price of the good. Total cost also slopes up, but with some curvature. At higher levels of output, total cost begins to slope upward more steeply because of diminishing marginal returns.
What does a straight line a curve passing through the origin represent? ›
In general, therefore, the equation y = mx represents a straight line passing through the origin with gradient m. The equation of a straight line with gradient m passing through the origin is given by y = mx . Consider the straight line with equation y = 2x + 1.
When a straight line supply curve passes through the origin? ›
Any straight line supply curve passing through the origin has value of elasticity equal to one. If straight line supply curve goes through the quantity axis (x- axis), it is inelastic. If a straight line supply curve goes through the price axis (y- axis), it is elastic.
The correct answer is Unity. A linear supply curve through the origin has a price elasticity of one (1). Accordingly, a 1% change in price will cause a 1% change in the amount delivered.
Is the total revenue curve positively sloped? ›
In case AR is constant, MR is also constant which implies that TR increases at a constant, positive rate. Hence, TR forms a straight line sloping upward. It passes through the point of origin simply because TR is zero when output is zero.
What is the slope of the total revenue curve quizlet? ›
the slope of the total revenue curve equals the slope of the total cost curve. it accepts the market price as a given.
What does TC curve slope show? ›
The slope of the total cost curves equals marginal cost. Therefore, when STC is tangent to LTC, SMC = LRMC. At the long–run cost–minimizing level of output LRTC = STC; LRATC = SATC and LRMC = SMC,. The long–run cost–minimizing level of output may be different from the minimum SATC.
What curve represents the total revenue curve for a perfectly competitive firm? ›
Total revenue for a perfectly competitive firm is a straight line sloping up. The slope is equal to the price of the good. Total cost also slopes up, but with some curvature. At higher levels of output, total cost begins to slope upward more steeply because of diminishing marginal returns.
Why is marginal revenue a horizontal line for the perfectly competitive firm? ›
It has this shape because the firm is a price taker in the market, and the additional revenue generated by selling one more unit is always equal to the prevailing market price, regardless of the number of units sold.
Why is the demand curve straight in perfect competition? ›
The Shape of Demand Curve Under Perfect Competition
In the case of an individual firm, the demand curve will be horizontal. But why is that? Well, since the firms are price takers, meaning they cannot influence the price of their goods, no matter how much they supply, the price will not change.
Are revenue curves for a perfectly competitive firm are the same horizontal line at the market price? ›
A perfectly competitive firm's demand curve is a horizontal line at the market price. This result means that the price it receives is the same for every unit sold. The marginal revenue received by the firm is the change in total revenue from selling one more unit, which is the constant market price.
