Managerial Economics BBA - Sem I PDF

**Faculty of Commerce and Management, SGT University** **Managerial Economics** **BBA - Sem I** **Faculty : Dr. Nitesh Rawat** **Module -- III** **Concept of Revenue** clip\_image002 **Total Revenue (TR):** Total Revenue refers to total receipts from the sale of a given quantity of a commodi...

**Faculty of Commerce and Management, SGT University** **Managerial Economics** **BBA - Sem I** **Faculty : Dr. Nitesh Rawat** **Module -- III** **Concept of Revenue** clip\_image002 **Total Revenue (TR):** Total Revenue refers to total receipts from the sale of a given quantity of a commodity. It is the total income of a firm. Total revenue is obtained by multiplying the quantity of the commodity sold with the price of the commodity. **Total Revenue = Quantity × Price** **Average Revenue (AR):** Average revenue refers to revenue per unit of output sold. It is obtained by dividing the total revenue by the number of units sold. **Average Revenue = Total Revenue/Quantity** **Marginal Revenue (MR):** Marginal revenue is the additional revenue generated from the sale of an additional unit of output. It is the change in TR from sale of one more unit of a commodity. **MR~n~ = TR~n~-TR~n-1~** Where: MR~n~ = Marginal revenue of nth unit; TR~n~ = Total revenue from n units; TR~ n-1 ~= Total revenue from (n -- 1) units; n = number of units sold  **Perfect Competition** Perfect competition describes a market structure where competition is at its greatest possible level.*** ***Ideally, perfect competition is a hypothetical situation which cannot possibly exist in a market. However, perfect competition is used as a base to compare with other forms of market structure. **Characteristics of a Perfect Competition** **1. A Large Number of Buyers and Sellers:** Under perfect competition there are a large number of buyers and sellers of a commodity. The numbers of buyers are so many that a single buyer buys a very small part of the market supply. Similarly, a single seller supplies a very small part of the total output. For this reason, the size of a competitive firm becomes very small in relation to the industry to which it belongs. **2. An Identical or a Homogeneous Product:** All the sellers in a perfectly competitive market supply an identical product. In other words, the prod­ucts of all the competitive firms are the same. **3. No Individual Control Over the Market Supply and Price:** As many sellers are selling an identical product, a single firm supplies a negligible or an insignificant portion of the industry. For this reason, it has no control over market supply and market price. In other words, a single firm cannot bring about an appreciable change in total supply through the variation in its own supply. As a result it cannot influence the market price through its own independent action. For this reason, a competitive firm is described as **"a price-taker, not a price-maker"**, and it has to sell all the units of its own output at the prevailing market price. **4. No Buyers' Preferences:** In a perfectly competitive market there is no preference of buyers for the product of any particular seller. As the products of all the sellers are identical, buyers can buy the product from any of them. **5. Perfect Knowledge:** Again, both buyers and sellers have a perfect or full knowledge relating to the price prevailing in the market. For this reason, there can exist only one price in a perfectly competitive product market. **6. Perfect Mobility of Factors:** The factors of production like labour or capital can freely move into the industry or freely go out of the industry. This is necessary to keep a proper balance between demand and supply of a commodity. **7. Free Entry and Free Exit of Firms:** In this type of market new firm can freely enter the industry or an existing firm can freely leave the industry in the long run. **8. Absence of Transport Cost and a Close Contact between Buyers and Sellers:** A market becomes perfectly competitive when both buyers and sellers stay at the same place so that there is a close contact between them. In the presence of any transport cost, prices will differ in the different segments of the same market. **Market Equilibrium and Determination of price under perfect competition.** **1. Total Cost-Total Revenue Analysis:** Output and Total Cost/ Revenue/ Profit The short-run equilibrium of the firm can also he shown with the help of total cost and total revenue curves. The firm is able to maximize its profits when the positive difference between TR and TC is the greatest. This is shown in Figure 3 where TR is the total revenue curve and TC the total cost curve. The total revenue curve is an upward sloping straight line curve starting from O. This is because the firm sells small or large quantities of its product at a constant price under perfect competition. If the firm produces nothing, total revenue will be zero The more it produces, the larger is the increase in total revenue. Hence the TR curve is linear and slopes upward. The firm will maximize its profits at that level of output where the gap between the TR curve and the TC curve is the maximum. Geometrically, it is that level at which the slope of a tangent drawn to the total cost curve equals the slope of the total revenue curve. In Figure 3, the maximum amount of profit is measured by TP at OQ output. At outputs smaller or larger than OQ between A and B points, the firm's profits shrink. If the firm produces OQ1 output, its losses are the maximum because the TC curve is above the TR curve. At Q1 its profits are zero. This is the break-even point of the firm. It starts earning profits when it produces beyond OQ1 output level. At OQ2 level, its profits are again zero. If it produces beyond this level, it incurs losses because TC \> TR. **Monopoly** A monopoly is a specific type of economic market structure. A monopoly exists when a specific person or enterprise is the only supplier of a particular good. As a result, monopolies are characterized by a lack of competition within the market producing a good or service. **Examples of Monopoly in Real Life** The following are examples of monopoly in real life. - **Railways** - **Microsoft** - **Google** - **Facebook** **Features** **1. Single supplier** A monopolistic market is regulated by a single supplier. Hence, the market demand for a product or service is the demand for the product or service provided by the firm.  **2. Barriers to entry and exit** Government licenses, patents, and [[copyrights]](https://corporatefinanceinstitute.com/resources/knowledge/other/copyright/)**,** resource ownership, decreasing total average costs, and significant startup costs are some of the barriers to entry in a monopolistic market. When one supplier controls the production and supply of a certain product or service, other companies are unable to enter the monopolistic market. **3. Profit maximisation** In a monopolistic market, the company maximizes profits. It can set prices higher than they would've been in a competitive market and earn higher profits. Due to the absence of competition, the prices set by the monopoly will be the market price.  **4. Unique product** In a monopolistic market, the product or service provided by the company is unique. There are no close substitutes available in the market.  **5. Price discrimination** A company that is operating in a monopolistic market can change the price and quantity of the product or service. Price discrimination occurs when the company sells the same product to different buyers at different prices. Considering that the market is elastic, the company will sell a higher quantity of the product if the price is low and will sell a lesser quantity if the price is high. **Monopolistic competition** Monopolistic competition is a market structure which combines elements of monopoly and competitive markets. Essentially a monopolistic competitive market is one with freedom of entry and exit, but firms can differentiate their products. Therefore, they have an inelastic demand curve and so they can set prices. However, because there is freedom of entry, supernormal profits will encourage more firms to enter the market leading to normal profits in the long term. **Examples of monopolistic competition** - Restaurants - Hairdressers. - Clothing. - TV programmes  **FEATURES OF MONOPOLISTIC COMPETITION:** **1. Large Number of Buyers and Sellers:** There are large number of firms but not as large as under perfect competition. That means each firm can control its price-output policy to some extent. It is assumed that any price-output policy of a firm will not get reaction from other firms that means each firm follows the independent price policy. **2. Free Entry and Exit of Firms:** Like perfect competition, under monopolistic competition also, the firms can enter or exit freely. The firms will enter when the existing firms are making super-normal profits. With the entry of new firms, the supply would increase which would reduce the price and hence the existing firms will be left only with normal profits. **3. Product Differentiation:** Another feature of the monopolistic competition is the product differentiation. Product differentiation refers to a situation when the buyers of the product differentiate the product with other. Basically, the products of different firms are not altogether different; they are slightly different from others. **4. Selling Cost:** Another feature of the monopolistic competition is that every firm tries to promote its product by different types of expenditures. Advertisement is the most important constituent of the selling cost which affects demand as well as cost of the product. The main purpose of the monopolist is to earn maximum profits; therefore, he adjusts this type of expenditure accordingly. **5. Lack of Perfect Knowledge:** The buyers and sellers do not have perfect knowledge of the market. There are innumerable products each being a close substitute of the other. The buyers do not know about all these products, their qualities and prices. Therefore, so many buyers purchase a product out of a few varieties which are offered for sale near the home. **6. Less Mobility:** Under monopolistic competition both the factors of production as well as goods and services are not perfectly mobile. **7. More Elastic Demand:** Under monopolistic competition, demand curve is more elastic. In order to sell more, the firms must reduce its price. **Oligopoly Market** The word Oligopoly is derived from two Greek words -- 'Oligo' meaning 'few' and 'Poly' meaning 'to sell'. Oligopoly is defined as a market structure with a small number of firms, none of which can keep the others from having significant influence. An Oligopoly market situation is also called 'competition among the few'. **Examples of Oligopoly** - Motor Vehicles - Mobile Phones - **Cellular Networks** **Characteristics of Oligopoly Market** **1. Interdependence:** The foremost characteristic of oligopoly is interdependence of the various firms in the decision making. This fact is recognized by all the firms in an oligopolistic industry. **2. Advertising:** Advertising is a powerful instrument in the hands of an oligopolist. A firm under oligopoly can start an aggressive advertising campaign with the intention of capturing a large part of the market. Other firms in the industry will obviously resist its defensive advertising. **3. Group Behaviour:** In oligopoly, the most relevant aspect is the behaviour of the group. There can be two firms in the group, or three or five or even fifteen, but not a few hundred. **4. Competition:** This leads to another feature of the oligopolistic market, the presence of competition. Since under oligopoly, there are a few sellers, a move by one seller immediately affects the rivals. So each seller is always on the alert and keeps a close watch over the moves of its rivals in order to have a counter-move. **5. Barriers to Entry of Firms:** As there is keen competition in an oligopolistic industry, there are no barriers to entry into or exit from it. However, in the long-run, there are some types of barriers to entry which tend to restrain new firms from entering the industry. **6. Lack of Uniformity:** Another feature of oligopoly market is the lack of uniformity in the size of firms. Firms differ considerably in size. Some may be small, others very large. Such a situation is asymmetrical. This is very common in the American economy. A symmetrical situation with firms of a uniform size is rare. **7. Existence of Price Rigidity:** In oligopoly situation, each firm has to stick to its price. If any firm tries to reduce its price, the rival firms will retaliate by a higher reduction in their prices. This will lead to a situation of price war which benefits none. **8. No Unique Pattern of Pricing Behaviour:** The rivalry arising from interdependence among the oligopolists leads to two conflicting motives. Each wants to remain independent and to get the maximum possible profit. Towards this end, they act and react on the price-output movements of one another which are a continuous element of uncertainty. **Cartel** A cartel is an agreement among competing firms to collude in order to attain higher profits. Cartels usually occur in an oligopolistic industry, where the number of sellers is small and the products being traded are homogeneous. Cartel members may agree on such matters are price fixing, total industry output, market share, allocation of customers, allocation of territories, bid rigging, establishment of common sales agencies, and the division of profits. **Purpose** - These are formed to protect the self-interest of a group of producers. The producers work in a group to regulate the prices of commodities. - Through this, the producers can easily raise the prices by observing the demand-supply ratio for the goods. - This member can decide jointly to restrict the supply in the market. - They can also decide to provide [entry barriers](https://www.wallstreetmojo.com/barriers-to-entry/) to their market. **Types of Cartels** **1 -- Price Cartels --** They fix the minimum prices as per their demand-supply ratio. Members cannot sale the products below such prices. **2 -- Term Cartels --** They agree on the terms of business on a standard basis. Each member is obliged to follow the terms of trade. Terms of trade can be delivery-mode, delivery-locations, delivery-time, terms of payment, charging of interest in case of delay, etc. **3 -- Customer Assignment Cartels --** Specific customers are assigned to each member. Thus, all customers are divided amongst the members to ensure appropriate flow of revenue. Each member shall maintain the dignity of allocation & should not grab customers of other members. **4 -- Quota Cartels --** Quota means the quantum of supply. Such type of collaboration offer to restrict the supply, which in turn upscales the prices in the market. Ever member much produce only up to quantum allocated to it & should not exceed the limit. **5 -- Zonal Cartels --** They allocate the geographical locations of the country, to each member in the cartel. Members should ensure to operate on their specific territory. **6 -- Syndicate Cartels --** Here, few members unit to sell jointly & reduce the cost of production. Such cartels intend to achieve the economies of scale. **7 -- Super Cartels --** These are high-level international collaborations. Cartels of the domestic country agree with cartels of the foreign country.