The relationship between average and marginal revenue
Marginal revenue (the extra income from selling one more unit) always falls faster than average revenue (income per unit). When a firm cuts its price to sell more, MR drops below AR.
Formula
MR < AR (when demand is downward-sloping)
Real World
When Ryanair cuts ticket prices to fill extra seats, the revenue gained on the new seat is lower than the average fare across all seats, because the price cut applies to every ticket sold — so MR falls below AR.
Exam Focus
In 'explain' questions, show MR falls at twice the rate of AR using a numerical example to secure full marks.
Price Elasticity of Demand
PED = % change in quantity demanded ÷ % change in price
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