10/7/2016 RevenueCurvesunderDifferentMarkets(WithDiagram)

EconomicsDiscussion

RevenueCurvesunder
DifferentMarkets
(WithDiagram)
ArticleSharedbyManojKumar

Letusnowexaminethenatureof
revenuecurvesunderdifferentmarket
situations:

(i)RevenueCurveunderPerfect
competition:
Perfectcompetitionisthetermappliedtoa
situationinwhichtheindividualbuyerorseller
(firm)representsuchasmallshareofthetotal
businesstransactedinthemarketthatheexerts
noperceptibleinfluenceonthepriceofthe
commodityinwhichhedeals.

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Thus,inperfectcompetitionanindividualfirm
ispricetaker,becausethepriceisdetermined
bythecollectiveforcesofmarketdemandand
supplywhicharenotinfluencedbythe
individual.Whenpriceisthesameforallunits
ofacommodity,naturallyAR(Price)willbe
equaltoMRi.e.,AR=MR.Therevenue
scheduleforacompetitivefirmisshowninthe
table5.

http://www.economicsdiscussion.net/revenue/revenuecurvesunderdifferentmarketswithdiagram/6877 1/12
10/7/2016 RevenueCurvesunderDifferentMarkets(WithDiagram)

Intable5wefindthatasoutputincreases,AR
remainsthesamei.e.Rs.5.Totalrevenue
increasesbutataconstantrate.Marginal
revenueisalsoconstanti.e.Rs.5andisequalto
AR.

Thus

TR=ARxQ

AlsoTR=MRxQ[SinceAR=MR]

Infigure8,ontheXaxis,wetakequantity
whereasonYaxis,wetakerevenue.Atprice
OP,thesellercansellanyamountofthe
commodity.Inthiscasetheaveragerevenue
curveisthehorizontalline.TheMarginal
RevenuecurvecoincideswiththeAverage
Revenue.

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10/7/2016 RevenueCurvesunderDifferentMarkets(WithDiagram)

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Itisbecauseadditionalunitsaresoldatthe
samepriceasbefore.InthatcaseAR=MR.A
noteworthypointisthatOPpriceisdetermined
bydemandandsupplyofindustry.

Thefirmonlyfollows,(seefigurebelow):

(ii)RevenueCurvesunderMonopoly:

Monopolyisoppositetoperfectcompetition.
UndermonopolybothARandMRcurvesslope
downward.Itindicatesthattosellmoreunitsof
acommodity,themonopolistwillhavetolower
theprice.Thiscanbeshownwiththehelpof
table6.

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10/7/2016 RevenueCurvesunderDifferentMarkets(WithDiagram)

Incaseofpuremonopoly,ARcurvecanbe
rectangularhyperbolaashasbeenshowninFig.
9.Inthissituation,aproducerissopowerful
thatbysellinghisoutputatdifferentprices,he
canmaketheconsumerspendhisincomeon
theconcernedcommodity.InthiscaseARcurve
isrectangularhyperbola.ItimpliesthatTRof
themonopolistwillremainsamewhatevermay
betheprice.AreabeloweachpointofARcurve
willbeequaltoeachother.WhenTRisconstant
MRcurvewillberepresentedbyOXaxisashas
beenshowninfigure9.

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10/7/2016 RevenueCurvesunderDifferentMarkets(WithDiagram)

(iii)RevenueCurveunderImperfect
Competition:

Whenafirmisworkingunderconditionsof
monopolyorimperfectcompetition,itsdemand
curveorARcurveislessthanperfectlyelastic,
theexactdegreeofelasticitybeingdifferentin
differentmarketsituationsdependinguponthe
numberofsellersandthenatureofproduct.

Inotherwords,thedemand/ARcurvehasa
negativeslopeandtheMRcurveliesbelowit.
Thisisbecausethemonopolistsellerordinarily
hastoacceptalowerpriceforhisproduct,ashe
increaseshissales.

Underimperfectcompetitionconditions,total
revenueincreasesatadiminishingrate.It
becomesmaximumandthenbeginstodecline.

Thepositionofvariousrevenuecurvesis
showninTable7:

Intable7,2unitscanbesoldataunitpriceof
Rs.5,bringingintotalrevenueofRs.10.When
3unitsaresold,thepriceperunitisloweredto
Rs.4tomakeitpossibleforlargerquantityto
besold.ThetotalrevenueinthiscaseisRs.12.

ThemarginalunitisnotbringinginRs.4which
isitsprice,butonlyRs.2.Thisisbecausethe

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10/7/2016 RevenueCurvesunderDifferentMarkets(WithDiagram)

additionaloneunitissoldatRe.onelessand
thefirst2unitswhichcouldhavebeensoldfor
Rs.5arealsosoldatRs.4.i.e.,Re.oneless.

Fig.10Ashowsthatasadditionalunitsaresold
whenpricecomesdownnotonlyforthe
marginalunitsbutalsoforotherpreviousunits.
Asaresult,marginalunitsdonotbringrevenue
equaltoitsprice.Infig.10B.TRincreasesata
diminishingrate,becomesmaximumatpointN
andthenbeginstodecline.Thishasbeen
representedbythecurveTR.ARatanypointon
theTRcurveisgivenbytheslopeofstraight
linejoiningthepointtotheorigin.Forinstance,
ARatanypointNonTRcurveisgivenbythe
slopeofline

(iv)RevenueCurvesunderOligopoly:
Underoligopolymarketsituationthenumberof
sellersissmall.Thepricereductionorextension
byonefirmaffectstheotherfirms.Ifaseller
raisesthepriceofhisproduct,otherswillnot
followhim.Theyknowthatbyfollowingthe
sameprice,theycanearnmoreprofits.That
producer,whohasraisedtheprice,islikelyto
sufferlossesbecausedemandofhisproductwill
fall.
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10/7/2016 RevenueCurvesunderDifferentMarkets(WithDiagram)

Inthiscase,asshowninFig.11,theARcurve
becomeshighlyelasticafterKwhereasitwas
lesselasticbeforeK.MR,correspondingtoAR
curverisesdiscontinuouslyfromb.Afterthatit
againtakesitscourseatanewhigherlevel.

(b)Ifafirmhasakinkeddemandcurvei.e.
whenitexpectsthatotherfirmswillfollow,then
itwillcuttheprice.InthatcaseMRcurvewill
bediscontinuousatthepointofthekink.This
canbeshownwiththehelpofaFig.12.

Ifunderoligopoly,asellerreducesthepriceof
hisproducthisrivalsalsofollowhimin
reducingthepriceoftheirproduct.Ifitisdone
so,hemaynotbeinapositiontoraisehissales.
ThusARcurvebecomeslesselasticfromK
onwardsandcorrespondinglyMRcurvefalls
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10/7/2016 RevenueCurvesunderDifferentMarkets(WithDiagram)

verticallyfromatobandthenslopesatalower
level.

Thus,fromtheaboveanalysiswecan
concludethat:

1.Underperfectcompetition,averagerevenue
curveisastraighthorizontallineandisequalto
MR.

2.Inpuremonopoly,ARcurveisarectangular
hyperbolaandMRcurvecoincideswiththe
horizontalaxis.

3.Inallothermarkets,ARcurveslopes
downwardsandMRcurveliesbelowit.In
oligopoly,however,ARcurvecannotbedrawn
withdefinitenessbutthepracticeistodraw
downwardslopingARandMRcurves.
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