← A Level Economics Revision · All Perfect competition (short-run profit) questions · Home
A-Level Economics · Perfect competition (short-run profit) diagram question
Why is this firm's AR = MR curve a HORIZONTAL line?
The diagram
The answer
The firm is a price taker — the market sets the price, so it earns the same £7 on every unit it sells. Think of a London taxi driver among thousands. Sell 1 unit or 100, you get £7 each time — so average revenue and marginal revenue are the same flat £7. There are so many sellers of an identical product that no one firm can move the price. Raise it and consumers switch instantly to a rival; cut it and you sold at less than you could have got. So the firm accepts £7 on every unit: P = AR = MR, drawn flat, perfectly elastic.
Test yourself properly
This is one of 6 questions on the perfect competition (short-run profit) diagram — every corner lettered, every wrong answer diagnosed.
▶ Play the perfect competition (short-run profit) game All questions & answers