2. Revenue Concepts
• Total Revenue (TR) is defined as the total amount of
money received by a firm from goods sold or services
rendered during a certain time period.
• Equation: Output price X Quantity PXQ
• Average revenue (AR) is the revenue earned per unit
of output sold.
• Equation: Total revenue / Quantity TR/Q = P
• Marginal Revenue(MR) is revenue a firm gains in
producing one additional unit of commodity.
• Equation: Change in total revenue/Change in
∆TR/∆Q output.
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3. Equilibrium
• Market demand is equal to market supply
For a firm
• The price at which the quantity demanded of
the product equals its quantity supplied is
called its equilibrium price and the
corresponding quantity is its equilibrium
quantity and the firm is said to be in
equilibrium.
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4. Rule for Equilibrium
• If the production and sale of an additional unit of
product adds more to revenue than to costs, profit
is increased and thus that unit should be produced
and sold. MR>MC
• If the additional unit of output involves larger costs
than revenue, it should not be produced. MR<MC
• The firm is in equilibrium when MR =MC
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5. Market
‘Market means the general field within which the
forces determine the price of a particular
commodity operate’ – Ely
A market is a body of persons in such
commercial relations that each can easily
acquaint himself with the rates at which
certain kinds of exchanges of goods or
services are from time to time made by the
others - Sidgwick
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7. Classification of Markets
• Area: local, regional, national & international
• Nature of transactions: spot & futures
• Volume of transactions: whole sale & Retail
• Time: very short , short & long period
• Status of sellers: primary, secondary & terminal
• Regulation: regulated & unregulated
• Competition : perfect & imperfect
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8. Types of Markets - Competition
Type of Nature of No. of No. of Entry Price Nature of
Market Product Buyers Sellers Conditions decision
variables
Perfect Homogen large large Free entry, Uniform Only Output
Competiti eous for free exit every
on all firms where
Simple & “ “ One Entry High Either output or
Discrimin barriers price &
ating Discrimination
Monopoly in prices
Monopoli Product “ Many Product Lower Extent of
stic differentia differentio than product
Competiti tion by n as entry Monopo differentiation
on each firm barrier ly and promotion
Duopoly Homogen Large Two Product High Competitors
eous or differentiati strategies
differentia on
ted A3 - 8
9. Types of Markets - Competition
Type of Nature of No. of No. of Entry Price Nature of
Market Product Buyers Sellers Conditions decision
variables
Oligopoly Homogen large A few Product High Competitors
eous or differentiat strategies
differentia ion
ted
Bilateral One One Entry Power Output and
Monopoly Homogen barriers of Seller Price
ous or Buyer
Monopso “ “ Large Free entry Lowest Adjusting
ny possible output
price according to
price
Oligopso Homogen A few “ No entry “ Competitors
ny eous or barriers strategies
differentia
ted
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11. Introduction
• Meaning: only one firm produces and sells a
particular commodity in the market.
• Definition: Firm and Industry coincide; the
single firm producing the product is itself both
the firm and the industry
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12. Main Features
• One and only firm(Seller).
• Single product
• No rivals or direct competitors of the firm.
• Indirect competition may exist.
• No other seller can enter the market.
• Monopolist is price maker.
• The monopolist is rational.
• Independent decision making
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13. Causes of Origin of Monopoly
• Legal monopoly: Copyrights, Patents, TMs
• Government policies: licensing
• Natural resources
• Exclusive knowledge of technology by the firm.
• Public benefit or interest.
• Price policy of the firm
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15. Equilibrium
• The monopolist can control both the price and
supply of the product. But at any point of time
he can fix only one of them
• Equilibrium Rule: MC = MR
• The AR curve is demand curve
• Cost curves are identical of perfect market
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17. Long-Run Equilibrium Under
Monopoly Competition
LMC
LAC
Price, Revenue, Cost
P
M
E
AR & D
MR
Quantity
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18. Price Discrimination
• The practice of discriminating among buyers on
the basis of price charged for the same good or
service.
• To maximise the profit the seller practices the
discriminating price strategy based on the
buyers income level, expectations.
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20. Bases
• Personal
• Geographical
• Time
• Purpose of use
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21. Oligopoly
• Oligopoly = market dominated by a few
sellers, at least several of which are large
enough relative to the total market that
they can influence the market price
• Oligopoly ⇒ more intense competition
than pure competition
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22. Oligopoly
• Why Oligopolistic Behavior is So Difficult
to Analyze
¤ Oligopolistic firms interact with each other
in complex ways, and almost anything can
and sometimes does happen under
oligopoly.
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23. Oligopoly
• Lines of Attack:
¤ Ignore interdependence
¤ Strategic interaction
¤ Cartels
¤ Price leadership and tacit collusion
• To understand everything except first
point, you must understand Game Theory
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24. Oligopoly and Game Theory
• Game Theory analyzes problems where
agents account for others’ actions when
taking a decision
• Ex: duopoly – two firms serving one
market
¤ Each firm supplies half of total quantity
¤ Choice of firm 1 affects choice of firm 2
and vice versa
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25. Monopolistic Competition,
Oligopoly, & Public Welfare
• Behavior is so varied that it is hard to
come to a simple conclusion about
welfare implications.
• In many circumstances, the behavior of
monopolistic competitors and oligopolists
falls short of the social optimum.
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26. Monopolistic Competition,
Oligopoly, & Public Welfare
• Oligopolistic market can be perfectly
contestable:
¤ If firms can enter and exit without losing
the money they have invested
• If so, then the performance of the firms is
likely to be close to perfectly competitive
• And thus, socially efficient
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27. Comparing the Four Market Forms
• Perfect competition and pure monopoly
are uncommon in reality.
• Many monopolistically competitive firms
exist.
• Oligopoly firms account for the largest
share of the economy’s output.
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28. Comparing the Four Market Forms
• Profits are zero in long-run equilibrium
under perfect competition and
monopolistic competition because of free
entry and exit.
• Consequently, AC = AR = P in long-run
equilibrium under these two market forms.
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29. Comparing the Four Market Forms
• In equilibrium, MC = MR for the profit-
maximizing firm under any market form.
• In the equilibrium of the oligopoly firm, MC
may be unequal to MR.
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30. Comparing the Four Market Forms
• Perfectly competitive firm and industry
theoretically ⇒ efficient allocation of
resources.
• Monopoly and monopolistic competition
are likely ⇒ inefficient allocation of
resources.
• Under oligopoly, almost anything can
happen, ⇒ impossible to generalize about
its vices or virtues.
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33. Introduction
• The concept of competition is used in two
ways in economics.
¤ Competition as a process is a rivalry
among firms.
¤ Competition as the perfectly competitive
market structure.
¤ A perfectly competitive market is one in
which economic forces operate unimpeded
33 A3 - 33
34. A Perfectly Competitive Market
• A perfectly competitive market must meet
the The number of sellers and buyers is large.
following requirements:
There are no barriers to entry and exit.
The firms’ products are identical or standardised.
Both buyers and sellers are price takers.
Each buyer and seller operates under conditions of
certainty.
There is complete information.
Firms are profit maximizers.
Each firm takes its independent action.
Perfect mobility of factors of production
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35. The Competitive Industry and
Firm typical firm can sell
1.The intersection of the market 3.The
supply and the market demand all it wants at the
curve… market price…
Price Market Price Firm
per unit per unit
S
35 35
Demand
Curve
D Facing the
Firm
Units of output Units of output
2.determine the 4.so it faces a
equilibrium market horizontal demand
price curve
35 A3 - 35
36. Goals and Constraints of the
Competitive Firm
• Perfectly competitive firm faces
a cost constraint like any other
firm
• Cost of producing any given
level of output depends on
¤ Firm’s production technology
¤ Prices it must pay for its inputs
36 A3 - 36
38. Profit Determination Using
Total Cost and Revenue
Curves TC TR
385 Loss
350
Total cost, revenue
315 Maximum profit =81
Profit
280
245
210 130
175
140
105 Profit =45
70
35 Loss
0
1 2 3 4 5 6 7 8 9 Quantity
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39. Marginal Cost, Marginal Revenue,
and Price
MC
Costs
Price = MR Quantity Marginal
Produced Cost
35.00 0 60
28.00
35.00 1 50
20.00
35.00 2
16.00
35.00 3 40 A C
14.00 P = AR = MR
35.00 4 B
12.00 30 A
35.00 5
17.00
35.00 6 22.00 20
35.00 7 30.00
35.00 8 10
40.00
35.00 9 54.00 0
35.00 10 68.00 1 2 3 4 5 6 7 8 9 10 Quantity
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40. Short run Equilibrium
• Depending upon the positions of the short
run cost curves, in short run, individual
firm can make
• Super normal profits
• Normal profits
• Losses
40 A3 - 40
41. Determining Profits Graphically
Price MC Price MC Price MC
65 65 65
60 60 60
55 55 55
50 50 50 ATC
45 45 ATC 45
40 D A P = MR=AR40 40 Loss P=MR=AR
35 35 35
30 Profit 30 P = MR=AR 30
B ATC
25 C 25 25
20 E 20 20
15 15 15
10 10 10
5 5 5
0 1 2 3 4 5 6 7 8 910 12 0 1 2 3 4 5 6 7 8 910 12 0 1 2 3 4 5 6 7 8 910 12
Quantity Quantity Quantity
(a) Super Profit case (b) Normal profit case (c) Loss case
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42. Determining Profit and Loss From
a Graph
• Find output where MC = MR.
¤ The intersection of MC = MR (P)
determines the quantity the firm will
produce if it wishes to maximize profits.
Find profit per unit where MC = MR .
Drop a line down from where MC equals
MR, and then to the ATC curve.
This is the profit per unit.
Extend a line back to the vertical axis to
identify total profit. A3 - 42
43. Determining Profit and Loss From
a Graph
• The firm makes a super profit when the ATC
curve is below the MR curve.
• The firm makes a normal profit when the ATC
curve is equal to the MR curve.
• The firm incurs a loss when the ATC curve is
above the MR curve.
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44. Special case: Exit / Shutdown
• The shutdown point Pointpoint at which the
is the
firm will be better off it shuts down than it will if
it stays in business.
• If total revenue is more than total variable cost,
the firm’s best strategy is to temporarily
produce at a loss.
• It is taking less of a loss than it would by
shutting down.
Condition I – Price < AVC – Shut down
Condition II – Price >= AVC – Continue
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45. The Shutdown Decision
MC
Price
60
50 ATC
40 Loss
30 P = MR=AR
AVC
20
A
10
0 2 6
4 8 Quantity
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46. Long-Run Competitive Equilibrium
• Profits and losses are inconsistent with
long-run equilibrium.
¤ Profits create incentives for new firms to
enter, output will increase, and the price
will fall until zero profits are made.
¤ The existence of losses will cause firms to
leave the industry.
¤ In the long-run equilibrium of a competitive
industry, all firms make normal profits.
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48. Price Determination in a Perfectly
Competitive Industry
• In the short run, the price does more of
the adjusting.
• In the long run, more of the adjustment is
done by quantity.
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49. Price Determination in a Perfectly
Competitive Industry
Price Determination in Market Period (very short run)
s • Supply of the
D’
D
commodity is fixed as
Price of Good
P’ E’ inputs are fixed in
D”
P E supply.
X
P” E”
D’
• Demand changes Price
D and Equilibrium points
D”
also change
accordingly.
Quantity of Good X
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50. Price Determination in a Perfectly
Competitive Industry
Price Determination in short run
• Supply of the
D’ s
commodity changes as
Price of Good
D variable factors can be
P’ E’ changed but scale of
X
D” plant is not possible.
P E D’
P” E” • Demand changes Price
D
s D”
and Equilibrium points
also change
Quantity of Good X
accordingly.
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51. Price Determination in a Perfectly
Competitive Industry
Price Determination in Long Run
• Supply of the
D commodity fully
LP
Price of Good
D’ S adjusted to meet the
P’ E’ changes in the industry
X
P E
as scale of plant is
E”
possible.
D
D’ • Supply changes Price
and Equilibrium points
Quantity of Good X
also change
accordingly.
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