Q.(a) Bring out the relationship between AR and MR curves under various price conditions.

(a) When price is constant (perfect competition) AR = MR and both are a horizontal line; when price falls to sell more (imperfect competition) MR lies below AR and both slope downward. (b) Consumer's surplus is the excess of the price a consumer is willing to pay over what he actually pays, shown as the area under the demand curve above the price line.

(a) Relationship between AR and MR curves under various price conditions

Average Revenue (AR) is revenue per unit (= price), and Marginal Revenue (MR) is the addition to total revenue from selling one more unit.

1. Under Perfect Competition (constant price): the firm is a price-taker and can sell any quantity at the ruling price. Since the price does not change, AR = MR = price. The AR and MR curves coincide as a single horizontal straight line parallel to the X-axis.
2. Under Imperfect Competition (monopoly / monopolistic competition): to sell more units the firm must lower its price, so AR (price) falls as output rises. Because price is reduced on all units, MR falls faster than AR, and the MR curve lies below the AR curve; both slope downward from left to right.
3. Relationship: the general relation is MR = AR (1 − 1/e), where e is the elasticity of demand. When AR is falling, MR is always less than AR; the gap between them depends on the elasticity.

Diagram (in words): Under perfect competition, AR and MR are one horizontal line. Under imperfect competition, draw two downward-sloping lines from the same point on the Y-axis, with the MR line below the AR line and (for a straight-line AR) MR falling at twice the slope.

(b) Theory of Consumer's Surplus (with diagram, described in words)

Concept (Marshall): Consumer's surplus is the difference between the price a consumer is willing to pay for a commodity and the price he actually pays for it. It arises because a consumer is usually willing to pay more for the earlier units than the market price.

Basis: it rests on the Law of Diminishing Marginal Utility — as more units are consumed, the utility (and hence the price the consumer is willing to pay) falls, but the market price is the same for all units.

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