Main Market Forms & Concepts of Revenue

June 27, 28

The determination of prices and outputs of various products depends upon the type of market structure.

Meaning of Market is economics state a situation where buyer and seller is in contract with each other to transact commodities at an agreed price. It does not means any place.

Introduction

Form of Market Structure

Number of Firms

Nature of Product

Price Elasticity of Demand

Degree of control over price

Perfect competition

A large number of firms

Homogeneous Product

Infinite None

Monopolistic A large number of firms

Differentiated product

Large Some

Pure Oligopoly

Few firms Homogeneous product

Small Some

Monopoly One Unique product

Very small Very large

Classification of Market Forms

A producer or seller of a commodity is very much concerned with the demand of the consumer for the commodity. Because it manipulate a seller’s earning or revenue. From the stand point of seller, demand curve for a product is the average revenue cure.

Average revenue:- An average revue (AR) can be obtained by dividing the total revenue by the number of units sold. Thus AR = total revenue divided by the total output.

Concepts of revenue

Marginal revenue (MR) is the net revenue earned by selling an additional unit of product. In other words, marginal revenue (MR) is the addition made to the total revenue by selling one more unit of a commodity. 

Marginal revenue

When there prevails a perfect competition in the market for a product, demand curve facing an individual firm is perfectly elastic and the price is beyond the control of a firm, so average revenue curve remains constant.

AR under perfect competition

Quantity

AR & MR

AR = MRP

0

Numbers of units sold are 1, 2, 3,4, 5, 6,. Price of the good is Tk 16, so write down a table consist of AR and MR under perfect competition market condition ?

Exercise

When imperfect competition prevails in the market for product, an individual firm producing that product face downward sloping demand curve. Which means when price falls then sale of addition units increase. Marginal revenue may be obtained by the difference between two successive total revenue decrease as well. Point is MR is less than AR.

AR under imperfect competition

How MR can be obtained from the changes in TR and what relation it bears with AR can be easily grasped from looking at the graph below:-

AR under imperfect competition

AR and MR

Quantity

ARMR0

No of units sold

Total revenue

(TR)

Average revenue (AR)

Marginal revenue (MR)

1 16 16 16

2 30 15 14

3 42 14 12

4 52 13 10

5 60 12 8

6 66 11 6

7 70 10 4

8 72 9 2

Table for TR, AR, and MR under imperfect competition

MR means the addition made to the total revenue by producing and selling an extra unit of output and MC means the additional made to the TC by producing an additional unit.

Now a firm will go on expanding its level of output until MC < MR, because it will be profitable. It will not be profitable for the firm to produce a unit of output where MC>MR.

So the equilibrium position is, the level of output where MC=MR.

Equilibrium of the firm: MR and MC approach

This equilibrium is in point E, where MC=MR. So equilibrium output level is OM.

Graph:-

Continue

Output

MR, MC

MC (supply)

MR (demand)

E

M

A

B

L

C

H

D

0

For a firm to be equilibrium, MC curve must cut MR curve from below at the point of equilibrium, that will as follows:-

Second order condition of equilibrium

MR

MC

0 Output

E F