Chapter 5. REVENUE Revenue curves when price varies with output (downward-sloping demand curve) –...
-
Upload
buck-lynch -
Category
Documents
-
view
243 -
download
1
description
Transcript of Chapter 5. REVENUE Revenue curves when price varies with output (downward-sloping demand curve) –...
Chapter 5
REVENUEREVENUE
• Revenue curves when price varies with output (downward-sloping demand curve)– average revenue (AR)
– marginal revenue (MR)
– total revenue (TR)
– revenue curves and price elasticity of demand
Revenues for a firm facing a downward sloping Revenues for a firm facing a downward sloping demand curvedemand curve
REVENUEREVENUE
• Revenue curves when price varies with output (downward-sloping demand curve)– average revenue (AR)
PQQP
QTRAR
.
• TR at P=6, Q = 3 is 18TR at P=6, Q = 3 is 18• TR at P=5, Q = 4 is 20TR at P=5, Q = 4 is 20• So MR = 2So MR = 2
• Alternative Story:Alternative Story:• Gain from selling one more unit = 5Gain from selling one more unit = 5• But now have reduced price from 6 to 5 on the first But now have reduced price from 6 to 5 on the first
three units sold.three units sold.• So losing 3*£1=£3 as a resultSo losing 3*£1=£3 as a result• MR = price of extra unit (5) less price reduction on MR = price of extra unit (5) less price reduction on
all units sold previously (3) = 5 – 3 = 2all units sold previously (3) = 5 – 3 = 2
-4
-2
0
2
4
6
8
1 2 3 4 5 6 7
Q(units)
1234567
P =AR(£)8765432
TR(£)
8141820201814
MR(£)
6420
-2-4
AR
MR
AR
, MR
(£)
Quantity
ARAR and and MRMR curves for a firm facing a downward-sloping curves for a firm facing a downward-sloping D D curvecurve
0
4
8
12
16
20
0 1 2 3 4 5 6 7
TRTR curve for a firm facing a downward-sloping curve for a firm facing a downward-sloping DD curve curve
TR
Quantity
TR (£
)
MR
-4
-2
0
2
4
6
8
1 2 3 4 5 6 7
AR
MR
Elasticity = -1Elastic
Inelastic
AR
, MR
(£)
Quantity
ARAR and and MRMR curves for a firm facing a downward-sloping curves for a firm facing a downward-sloping D D curvecurve
£
Q O
AC
MC
MR
AR
Profit maximising under monopolyProfit maximising under monopoly
£
Q O
AC
MC
AR
AC
Qm
MR
AR
a
b
Profit maximising under monopolyProfit maximising under monopoly
..and profits?
£
Q O
AC
MC
MR
AR
Profit maximising under monopolyProfit maximising under monopoly
£
Q O
P0
Qm
a
b
What is the supply curve for the monopolist?What is the supply curve for the monopolist?
P1
The Supply Curve is a unique relationship between Price and
Quantity
Here we found that monopolist will
supply the same amount at two different prices
So no Supply Curve
MONOPOLYMONOPOLY
• Defining monopoly• Barriers to entry
– economies of scale– product differentiation and brand loyalty– lower costs for an established firm– ownership or control over key factors– ownership or control over outlets– legal restrictions– mergers and takeovers– aggressive tactics– intimidation
• Natural monopoly
Natural MonopolyNatural Monopoly£
O Q
LRAC
Long –Run average cost curve is downward sloping
When will this occur?
If there are large Fixed Costs and small MC
MC
£
Q O
MC
Q1
MR
AR = D
P1
Equilibrium of industry under perfect competition and monopoly:Equilibrium of industry under perfect competition and monopoly: with the same with the same MCMC curve curve
MONOPOLYMONOPOLY
• Disadvantages of monopoly– high prices / low output: short run– high prices / low output: long run– lack of incentive to innovate– X-inefficiency
• Advantages of monopoly– economies of scale
Natural MonopolyNatural Monopoly£
O Q
LRAC
MC
Industry Demand CurveIndustry Demand Curve£
O Q
D
If two firms in the industry (A Duopoly) the demand curve for
each is D1
Pmax
At prices above Pmax competitor gets all the
businessDD
An alternative version of the story is to examine an An alternative version of the story is to examine an industry where the cost curve an individual firm industry where the cost curve an individual firm
faces falls as the scale of production rises.faces falls as the scale of production rises.
SO now we are going to examine the Equilibrium of SO now we are going to examine the Equilibrium of industry under perfect competition and monopoly:industry under perfect competition and monopoly:
with with different different MCMC curvescurves
£
Q O
MC ( = supply)perfect competition
MRQ2
MCmonopoly
AR = D
Equilibrium of industry under perfect competition and monopoly:Equilibrium of industry under perfect competition and monopoly:with different with different MCMC curves curves
P2=MR. =MC
£
Q O
MC ( = supply)perfect competition
Q1
MR
P1
P2
Q2
MCmonopoly
P3
AR = D
Suppose a regulator set the price at PSuppose a regulator set the price at P3 3 (Average Cost Pricing). How (Average Cost Pricing). How would this effect the behaviour of the monopolists?would this effect the behaviour of the monopolists?
AC
MONOPOLYMONOPOLY
• Disadvantages of monopoly– high prices / low output: short run– high prices / low output: long run– lack of incentive to innovate– X-inefficiency
• Advantages of monopoly– economies of scale– profits can be used for investment (dodgy!!)– promise of high profits encourages risk taking (Still a bit
dodgy – what is appropriate risk taking?)