Market structure

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Different concepts of revenue
Qty Price TR AR MR
Sold Reve.
1 6 6 6 6
2 5 10 5 4
3 4 12 4 2
4 3 12 3 0
5 2 10 2 -2 TR maximum

6 1 6 1 -4 TR

Revenue

AR

MR
2
Qty Sold
Relation b/w AR and MR Curves
1. Revenue Curves under perfect competition. One
price prevails upon entire market at a given
time. Any amount of commodity can be bought
or sold at a ruling price. As the price remains
constant, the total revenue will increase
proportionately with sales. Then price will be
equal AR and also MR
Perfect Competition

TR = MR
D D
Revenue

Qty Sold
3
2. Revenue curve under monopoly
AR curve is downward sloping. MR curve is
below the AR curve and lies halfway on the
perpendicular drawn from y axis and which
touches AR. The reason is that a monopolist
can increase the sale by lowering the price.
MR falls but falls faster than AR.
Revenue

AR

MR

Qty Sold

4
3. Revenue under imperfect competition Cont…
 Under Oligopoly – few sellers selling homogeneous
products. Upper portion from point on AR curve is
more elastic. It is under the assumption that when
one firm changes its price, its sale is immediately
effected. Lower portion below K assumes that all
firms will lower their prices. The gap PR in MR curve
arises because of sudden change in AR curve from
being more elastic to less.
RM negative shows that the
revenue will not increase if all AR

Revenue
the firms lower the price. K
MR
P

R (AR)

Qty Sold MR
5
M
3. Revenue under imperfect competition Cont…
 Curvilinear Average Revenue – this curve can either be
concave or convex. In either situations the MR curve
will not be the half way from the AR curve.
Revenue

Revenue
AR
AR

MR
MR
Qty Sold
Qty Sold 6
Significance of the concept of revenue and price analysis
1. Knowledge of firms equilibrium: every
producer wants to have maximum profit. He
can do so by carefully studying the behavior
of MC and MR. When MR>MC, producer
wants to increase the output to increase
profit. When MR<MC, he has to decrease the
output to avoid losses. When MR=MC, he is
in equilibrium.
2. Knowledge about full capacity or under
capacity production: If the AR curve is
tangent to the AC curve at its minimum
point, the firm is at its full capacity.

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Significance of the concept of revenue and price
analysis –cont..
3. Estimating profit and loss
If the TR > TC, a firm gets abnormal profits. If
TR<TC, there is loss. If TC is just equal to TR,
the firm makes normal profits.
If AR>AC, there is supernatural profit. If AR<AC,
there is loss. If AR=AC, there is normal profit.
3. Change in Price:
If the TR increases when there is a decrease in
price as in the case of elastic demand, it is
profitable to lower the same. In case of inelastic
demand TR will increases by raising per unit
price of the product.
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