ECONOMICS PPT Overall.pptx Revenue and Cost Concepts

Concepts of Revenue and Concepts of Cost

1. Total revenue Curve Initially, as output increases total revenue (TR) also increases , but at a decreasing rate. It eventually reaches a maximum and then decreases with further output. Average revenue Curve However, as output increases the average revenue (AR) curve slopes downwards. The AR curve is also the firm’s demand curve. Marginal revenue Curve The marginal revenue (MR) curve also slopes downwards, but at twice the rate of AR . This means that when MR is 0, TR will be at its maximum. Increases in output beyond the point where MR = 0 will lead to a negative MR.

2. Perfect Competition Definition Perfect competition is a unique form of the marketplace that allows multiple companies to sell the same product or service . Many consumers are looking to purchase those products.

3. Features of Perfect Competition The main features of  perfect competition  are as follows : Many Buyers and Sellers  – There will always be a huge number of buyers and sellers in this form of marketplace. Homogeneity – The product or service produced by the buyers in a perfectly competitive market should be homogenous in all respects. There should be no differentiation between them in terms of quantity, size, taste, etc ., Free Entry and Exit  – Another condition of a perfectly competitive market is that no artificial restrictions prevent a firm’s entry, or compel an existing firm Perfect Knowledge –  The buyers and sellers have perfect knowledge about the market conditions. The buyers are aware of the details of the product sold as well as its price . At the same time, the sellers know about the potential sales of their products at different price points. Since the buyers are already informed about the product, there is no need for advertising or sales promotion.

4. Mobility of Factors of Production – The factors of production like labour , raw materials and capital should have total mobility under perfect competition . The labour should have the freedom to move from one place (industry, market or production unit) to another depending on their remuneration. Even the raw materials and capital should not have any restrictions in movement. Transport Cost – In the perfectly competitive market, the costs for transporting goods, services or factors of production from one place to another is either zero or constant for all sellers. The assumption is that all sellers are equally near or farther away from the market . Thus, the transport cost is uniform for all of them . The result is that the overall costs for production and the selling price are the same across the board . Absence of Artificial Restrictions – There is no interference from the government or any other regulatory body to hinder the smooth functioning of the perfect competition . There are no controls or restrictions over the supply or pricing and the price can change solely based on the demand and supply conditions. Uniform Price – There is a single uniform price for all products and services in a perfectly competitive market. The forces of demand and supply determine it.

5. What is Monopoly Market? Monopoly is a completely opposite form of market and is derived from two Greek words, Monos (meaning single) and Polus (Meaning seller). A market situation where there is only one seller in the market selling a product with no close substitutes is known as  Monopoly. For example,  Indian Railways. In a monopoly market, there are various restrictions on the entry of new firms and exit of the existing firms. Also, there are chances of Price Discrimination in a Monopoly market. 

6. Features of Monopoly 1. Single Seller:  Under Monopoly, there is only one seller selling the product in the market. It means that the monopoly firm and the industry are the same in this form of market . As there is one seller, the monopolist has full control over the price and supply of the product. Whereas, the number of buyers in a Monopoly market is large, which means that no single buyer can influence the price of a product in the market.  2. No Close Substitutes:  As there is a single seller selling the product under a monopoly market, there are no close substitutes for the same. Therefore, a monopoly firm has no fear of competition from other firms, either new or existing ones.  For example,  Indian Railways has no close substitute for transportation services. However, there are other distant services like metro, etc. 

7. 3. Price Discrimination:  As a monopolist is a single seller in the market, he/she can charge different prices at the same time from a different set of consumers , which is also known as  Price Discrimination . 4 . Restrictions on Entry and Exit: Under a Monopoly market, there are strong restrictions/barriers on the entry of new firms and exit of the existing firms . It means that a monopoly firm can earn abnormal losses and profits in the long run. One of the reasons behind the barriers may be legal restrictions, like licensing, patent rights, etc., or it might be due to the restrictions in the form of cartels created by the firms.  5. Price Maker:  As there is only one seller under the monopoly market, and the firm and the industry are the same things, the seller has a complete control over the price of the product. Being a sole seller, the monopolist can influence the supply of goods in the market and can fix the price on their own. 

8. Reasons for Emergence of Monopoly The basic cause of the existence of monopoly is the barrier of entry into the market. Various other reasons for the emergence of Monopoly are as follows: Government Licensing: Before entering into an industry, a firm has to take permission from the government and obtain a license for the same. Licensing helps a firm in ensuring minimum standards of competency. Therefore, sometimes government does not grant the license to the new firms so they can make sure that only one firm runs in the market. Patent Rights:  Many big private companies perform Research and Development activities at their own risk and sometimes if the R&D gets successful, they come up with a new product or technology. For the risk, they have taken in R&D, the government as a reward grants them patent rights. A patent right is the right granted by the government to a firm or manufacturer to use or sell their invention for a certain period of time. The period for which patent rights are granted to the firms or manufacturers is known as  patent life . 

9. 3. Control on Raw Materials:  Another reason for the emergence of Monopoly is sole ownership or control of the essential raw materials required in a specific industry.  For example,  De Beers control a large percentage of the world’s production of diamonds and can therefore influence the market . 4. Association:   Some firms use unions to retain their individuality and coordinate their output and pricing policies so they can act as a monopoly. They also agree among themselves to restrict their total output up to the level at which they can maximize their joint profits. One of the most famous  examples  of a cartel in monopoly is OPEC (Organization of Petroleum Exporting Countries).  

10. Determining the Price and Equilibrium of a Firm under Monopoly Under monopoly, for the equilibrium and price determination there are two different conditions which are: 1. Marginal revenue must be equal to marginal cost. 2. MC must cut MR from below. However, there are two approaches to determine equilibrium price under monopoly viz .; 1. Total Revenue and Total Cost Approach. 2. Marginal Revenue and Marginal Cost Approach.

11. Total Revenue and Total Cost Approach: Monopolist can earn maximum profits when difference between TR and TC is maximum. By fixing different prices, a monopolist tries to find out the level of output where the difference between TR and TC is maximum. The level of output where monopolist earns maximum profits is called the equilibrium situation. This can be explained with the help of fig. 2.

12. In Fig. 2, TC is the total cost curve. TR is the total revenue curve. TR curve starts from the origin. It indicates that at zero level of output, TR will also be zero. TC curve starts from P. It reflects that even if the firm discontinues its production, it will have to suffer the loss of fixed costs Total profits of the firm are represented by TP curve. It starts from point R showing that initially firm is faced with negative profits. Now as the firm increases its production, TR also increases. But in the initial stage, the rate of increase in TR is less than TC.

13. Therefore, RC part of TP curve reflects that firm is incurring losses. At point M, total revenue is equal to total cost. It shows that firm is working under no profit, no loss basis. Point M is called the breakeven point. When firm produces more than point M, TR will be more than TC. TP curve also slopes upward. It shows that firm is earning profit. Now as the TP curve reaches point E then the firm will be earning maximum profits. This amount of output will be termed as equilibrium output.

14. Marginal Revenue and Marginal Cost Approach : According to marginal revenue and marginal cost approach, a monopolist will be in equilibrium when two conditions are fulfilled i.e., MC=MR and MC must cut MR from below. The study of equilibrium price according to this analysis can be conducted in two time periods . 1. The Short Run 2. The Long Run