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Anirban / Micro Economics / ModuleAnirban / Micro Economics / Module 6 / CCIM 6 / CCIM

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MANAGERIAL ECONOMICSMANAGERIAL ECONOMICSMODULE 6MODULE 6

BY BY

Mr. AnirbanMr. Anirban

Christ College Institute of Christ College Institute of ManagementManagement

BangaloreBangalore


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TR, MR & ARTR, MR & ARTotal revenue:Total revenue: The TR represents the total earnings of a rational producer, at a The TR represents the total earnings of a rational producer, at a

given period of time by the unit combination of price & quantity. given period of time by the unit combination of price & quantity. So TR = P x Q.So TR = P x Q. Under perfect competition price taker, price of the product is Under perfect competition price taker, price of the product is

constant, which is market determined. constant, which is market determined. A competitive seller can sell any amount of product at a fixed A competitive seller can sell any amount of product at a fixed

market determined price, so TR must be +vely sloped straight line market determined price, so TR must be +vely sloped straight line from the origin.from the origin.

Under monopoly price maker, price of the product is variable, i.e. Under monopoly price maker, price of the product is variable, i.e. lowering the price the monopolist can sell higher output, as both lowering the price the monopolist can sell higher output, as both the forces are moving opposite direction, so TR must be a +vely the forces are moving opposite direction, so TR must be a +vely sloped curvature concave to the Q axis from the origin.sloped curvature concave to the Q axis from the origin.

Let the demand function is Q = f (P), where the linear form can be Let the demand function is Q = f (P), where the linear form can be written as Q = a + Bp, where a>0 , b<0written as Q = a + Bp, where a>0 , b<0

So P = Q (1/b) – a/b and so TR = QSo P = Q (1/b) – a/b and so TR = Q22 (1/b) + (- a/b) Q, the TR curve (1/b) + (- a/b) Q, the TR curve must be +vely sloped curvature from the origin.must be +vely sloped curvature from the origin.


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TR, MR & ARTR, MR & AR

Average Revenue Curve:Average Revenue Curve: AR represents per unit of revenue, i.e. AR represents per unit of revenue, i.e.

AR = TR/Q = P.Q / Q = PAR = TR/Q = P.Q / Q = P So Equation of AR = Q (1/b) – a/b.So Equation of AR = Q (1/b) – a/b. From the equation we can discuss the From the equation we can discuss the

following characteristics of AR, following characteristics of AR, – Slope of AR Curve = (1/b) < 0Slope of AR Curve = (1/b) < 0– Intercept = (-a/b) >0Intercept = (-a/b) >0– So AR starts from +veSo AR starts from +ve vertical vertical

intercept.intercept.


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TR, MR & ARTR, MR & AR

Average Revenue Curve:Average Revenue Curve: MR represents the last unit revenue, i.e. MR represents the last unit revenue, i.e.

MR = d/dq (TR) = d/dq [MR = d/dq (TR) = d/dq [QQ22 (1/b) + (- a/b) Q] (1/b) + (- a/b) Q] = (2/b)Q + (-a/b)= (2/b)Q + (-a/b)

The characteristics of the above The characteristics of the above equation will be as follows :equation will be as follows :

It must be a straight line.It must be a straight line. Negatively sloped (= 2/b <0)Negatively sloped (= 2/b <0) It starts from +ve vertical intercept.(=-a/b It starts from +ve vertical intercept.(=-a/b

>0)>0)


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AR & MRAR & MR When AR and Mr. both are in linear form,When AR and Mr. both are in linear form,

– The intercept of AR line = -a/b = intercept of MR line, The intercept of AR line = -a/b = intercept of MR line, so both the lines starts from same +ve vertical so both the lines starts from same +ve vertical intercept.intercept.

– Slope of AR = 1/b & Slope of MR = 2/b, any Slope of AR = 1/b & Slope of MR = 2/b, any perpendicular drawn from AR line to the vertical axis perpendicular drawn from AR line to the vertical axis must be bisected by the MR line where BC = CD.must be bisected by the MR line where BC = CD.

When AR and Mr. both are in linear form,When AR and Mr. both are in linear form,– When the AR curve is convex to the origin, the MR When the AR curve is convex to the origin, the MR

curve will be close to the vertical axis where BC < CD.curve will be close to the vertical axis where BC < CD.– When the AR curve is concave to the origin, the MR When the AR curve is concave to the origin, the MR

curve will be closer to the AR curve BC > CD.curve will be closer to the AR curve BC > CD.


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Perfect CompetitionPerfect Competition Large no of buyers and sellers.Large no of buyers and sellers. Homogeneous product, which mean they are perfectly Homogeneous product, which mean they are perfectly

divisible or substitute to each other.divisible or substitute to each other. Price of the product are constant which are market Price of the product are constant which are market

determined.determined. Free entry or exist of firms in the INDUSTRY.Free entry or exist of firms in the INDUSTRY. Basic objectives of a firm is profit maximization which can be Basic objectives of a firm is profit maximization which can be

achieved by sales promotion.achieved by sales promotion. No Government restrictions.No Government restrictions. Absence of advertisement and selling cost.Absence of advertisement and selling cost. Absence of “ Non price competition”Absence of “ Non price competition” Sellers are not organized.Sellers are not organized. Transportation cost is nil.Transportation cost is nil. Price of the commodity, Product cost etc… should be known Price of the commodity, Product cost etc… should be known

by the sellers and the buyers both.by the sellers and the buyers both. The inputs of the production are continuous in nature.The inputs of the production are continuous in nature. The Firm is the price accepter and the industry is the price The Firm is the price accepter and the industry is the price

determiner.determiner.


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Perfect CompetitionPerfect CompetitionEquilibrium Condition: (Short Run Equilibrium)Equilibrium Condition: (Short Run Equilibrium) The profit equation can be written as, Profit = TR – TC = The profit equation can be written as, Profit = TR – TC =

PPcc.Q – TC (As P is constant).Q – TC (As P is constant)

Necessary Condition:Necessary Condition: d(Profit)/ dq = d/dQ (TR – TC) = 0, i.e. Pd(Profit)/ dq = d/dQ (TR – TC) = 0, i.e. Pcc = MC = MR = MC = MR

Sufficient Condition:Sufficient Condition: dd22/dQ/dQ22 < 0, i.e. d/dQ (P < 0, i.e. d/dQ (Pcc - MC), i.e. d/dQ (- MC) < 0, i.e. - MC), i.e. d/dQ (- MC) < 0, i.e.

Slope of the MC curve > 0 , i.e. Slope of the MC curve Slope of the MC curve > 0 , i.e. Slope of the MC curve >0, So at equilibrium MC must be rising.>0, So at equilibrium MC must be rising.


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Monopoly MarketMonopoly Market Monopoly is said to be exist when one firm is Monopoly is said to be exist when one firm is

the sole produces or seller of a producer or the sole produces or seller of a producer or seller of a product which has no close seller of a product which has no close substitutes.substitutes.

From the above three points are worth noting From the above three points are worth noting in this definition :in this definition :– There must be only one single producer or seller There must be only one single producer or seller

of the product.of the product.– No close substitute of the product should be No close substitute of the product should be

available.available.– Strong barriers to the entry of the firms into the Strong barriers to the entry of the firms into the

Industry exists.Industry exists.


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Monopoly MarketMonopoly Market

Characteristics:Characteristics: Single seller and large no of buyers.Single seller and large no of buyers. The product has no close substitute.The product has no close substitute. Price of the product is variable.Price of the product is variable. The concept of entry and exist is blocked by definition.The concept of entry and exist is blocked by definition. The concept of firm and industry is synonymous.The concept of firm and industry is synonymous. The basic objectives is profit maximization.The basic objectives is profit maximization. Government control may exist.Government control may exist. Advertising or selling cost may exist where the basic Advertising or selling cost may exist where the basic

target of the advertisement is welfare maximization.target of the advertisement is welfare maximization. As the monopolist is the only seller in the market, so As the monopolist is the only seller in the market, so

supply of the goods in the market is fully controlled by supply of the goods in the market is fully controlled by the marketer.the marketer.


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MONOPOLYMONOPOLY

Equilibrium Condition:Equilibrium Condition: The main objectives of any firm is The main objectives of any firm is

profit maximization where, profit maximization where, – Profit = TR – TC = R(q) – C(q)Profit = TR – TC = R(q) – C(q)

Necessary Condition:Necessary Condition: d/dq (profit) = 0, i.e. MR = MCd/dq (profit) = 0, i.e. MR = MCSufficient Condition:Sufficient Condition: dd2 2 (Profit)/dq(Profit)/dq22 < 0, i.e. Slope of MR < < 0, i.e. Slope of MR <

Slope of MC, i.e. MC cuts MR from Slope of MC, i.e. MC cuts MR from below.below.


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Monopolistic MarketMonopolistic Market The concept of monopolistic competition has been introduced in the The concept of monopolistic competition has been introduced in the

literature by Prof. Chamberlin.literature by Prof. Chamberlin. The important characteristics of the Monopolistic competition are as The important characteristics of the Monopolistic competition are as

follows:follows: There are large no of sellers and buyers but not like perfect competition.There are large no of sellers and buyers but not like perfect competition. Each seller produces differentiate product which is different from the Each seller produces differentiate product which is different from the

product of others but which is close substitute to each other.product of others but which is close substitute to each other. Selling cost or advertisement cost are necessary in M.C.Selling cost or advertisement cost are necessary in M.C. Free entry or exist is there.Free entry or exist is there. Group is used in place of Industry.Group is used in place of Industry. The objective of the firm is profit maximization.The objective of the firm is profit maximization. The price of the inputs and technology is given.The price of the inputs and technology is given. Demand and Cost function known certainly.Demand and Cost function known certainly. All the firm in the group have identical demand and cost function.All the firm in the group have identical demand and cost function. Prof. Chamberlin distinguishes two types of demand curves faced by an Prof. Chamberlin distinguishes two types of demand curves faced by an

individual firm, Actual or proportional demand curve (DD) and Expected individual firm, Actual or proportional demand curve (DD) and Expected demand curve or pre received demand curve (dd).demand curve or pre received demand curve (dd).

Existence of non price competition.Existence of non price competition.

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