The following points highlight the four key benefits of AR and MR curves. The key benefits are: 1. Profit Determination 2. Determination of Full Capacity 3. Equilibrium Determination 4. Factor-Pricing Determination.
Key Benefit # 1. Profit Determination:
The AR curve is the price line for the producer in all market situations. By relating the AR curve to the AC curve of a firm, it can be found out whether it is earning supernormal or normal profits or incurring losses. If the AR curve is tangent to the AC curve at the point of equilibrium, the firm earns normal profits.
If the AR curve is above AC curve, it makes supernormal profits. In case the AR curve is below the AC curve at the equilibrium point, the firm incurs losses.
Key Benefit # 2. Determination of Full Capacity:
It can also be known from their relationship whether the firm is producing at its full capacity or under capacity. If the AR curve is tangent to the AC curve at its minimum point, (as under perfect competition) the firm produces at its full capacity. Where it is not so (as under monopoly or monopolistic competition), the firm possesses idle capacity.
Key Benefit # 3. Equilibrium Determination:
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The MR curve when intersected by the MC curve determines the equilibrium position of the firm under all market situations. Their point of intersection in fact determines price, output, profit or loss of a firm.
Key Benefit # 4. Factor-Pricing Determination:
The use of the average-marginal revenue helps in determining factor prices. In factor-pricing, they are inverted U-shaped and the average and marginal revenue curves become the average revenue productivity and marginal revenue productivity curves (ARP and MRP) and are useful tools in explaining the equilibrium of the firm under different market conditions.