E-LESSON-8 MICRO ECONOMICS-1 ENG

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B.A.English 2 All right are reserved with CU-IDOL Micro economics-I Course Code: BAQ108 First Semester: 8 e-Lesson: 8 SLM Unit: www.cuidol.in Unit-8(BAQ108)

MICRO ECONOMICS 33 OBJECTIVES INTRODUCTION To enable the students to describe the In this unit we are going to learn working of an economy at the micro about meaning of revenue and its level. types. To analyze and understand the Under this you will learn and behavior of consumers in the markets. understand the TR, AR and MR, relationship between TR, AR and To evaluate, analyze and interpret MR and their curves. factor affecting the behavior of producers www.cuidol.in Unit-8(BAQ108) INSTITUTE OF DISTANACEll ArNigDhtOaNrLeINreEsLeErAvRedNIwNiGth CU-IDOL

TOPICS TO BE COVERED 4 Introduction of revenue Revenue meaning Revenue types( TR, AR and MR). Relationship between TR, AR and MR and their curves. Analysis of Revenue. www.cuidol.in Unit-8(BAQ108) All right are reserved with CU-IDOL

Meaning of Revenue 5 Total amount of money value received by a firm or an industry by selling the goods and services is known as the revenue. For example if a firm produce 100 units of commodity per day and sells it at Rs.20 per unit then its total revenue is Rs. 2000 per day.  The revenue can be classified into three category such as ;  Total Revenue (TR).  Average Revenue (AR).  Marginal Revenue (MR). Each curve have different characteristics for different market structure www.cuidol.in Unit-8(BAQ108) All right are reserved with CU-IDOL

Concept of TR 6 Total revenue is the total money received from the sale of any given quantity of output. The total revenue is calculated by taking the price of the sale times the quantity sold, i.e. TR = Price × Quantity. Total sum of money value received from the sales of various quantities of output of product produced during a given period of time at certain price level is known as total revenue of a firm or an industry for that time period Example: If price is ` 10 and quantity sold is 100, then total revenue would be ` 1000 www.cuidol.in Unit-8(BAQ108) All right are reserved with CU-IDOL

Concept of AR 7 Average Revenue (AR): Per unit revenue of a product is known as average revenue. We obtain AR by dividing (TR) by the corresponding quantity sold (Q). www.cwuwidwo.clu.iidnol.in UUnniitt--81(B0A(BQB10A81) 03/BCM103) INSTITUTE OF DISTANCE AND ONLAINllErLiEgAhtRaNrIeNrGeserved with CU-IDOL

Concept of MR 8 An additional amount of money received from the sells of one additional unit of a product or output. In other words, marginal revenue is the change in total revenue due to change in the quantity sold on the market by one unit. Where, Δ = change Δ TR = change in total revenue Δ Q = change in quantity sold in the market. www.cwuwidwo.clu.iidnol.in UUnniitt--81(B0A(BQB10A81) 03/BCM103) INSTITUTE OF DISTANCE AND ONLAINllErLiEgAhtRaNrIeNrGeserved with CU-IDOL

Concept of MR 9 In order to have maximum total revenue, two conditions have to be fulfilled: m  The first order derivative or the MR function should be zero.  The second order derivative .or the slope of the MR function should be negative www.cuidol.in Unit-8(BAQ108) All right are reserved with CU-IDOL

GRAPHICAL PRSENTATION 10 www.cwuwidwo.clu.iidnol.in UUnniitt--81(B0A(BQB10A81) 03/BCM103) INSTITUTE OF DISTANCE AND ONLAINllErLiEgAhtRaNrIeNrGeserved with CU-IDOL

Relation between TR, AR and MR 11  (a) There is a large number of firms selling a product at a constant price. An individual firm is so small in the market that it cannot change price of the product. Or, it has no control over price of the product. Accordingly, to a firm, price is given of course, it can sell any amount of the product at a given price.  (b) A firm enjoys partial control over price through product differentiation or it has full control over price .because it is a monopoly firm. Accordingly, a firm can plan to increase its sale by lowering its price The basic difference between the two situations is the following  (a) When a firm has no control over price, it can sell any amount at a given price. Accordingly, firm’s demand curve (or AR curve) is a horizontal straight line .  (b) When a firm has partial or full control over price, it can sell more of a product only by lowering its price. Accordingly, its demand curve (or AR curve) slopes downward, showing a negative relationship between price and output www.cuidol.in Unit-8(BAQ108) All right are reserved with CU-IDOL

GRAPHICAL EXPLANATION 12 The relationship can be summed up as under: 1. As long as MR is positive, TR increases (or when TR rises, MR is positive). 2. When MR is zero, TR is at its maximum point (or when TR is maximum, MR is zero). 3. When MR becomes negative, TR starts falling (or when TR falls, MR is negative). www.cwuwidwo.clu.iidnol.in UUnniitt--81(B0A(BQB10A81) 03/BCM103) INSTITUTE OF DISTANCE AND ONLAINllErLiEgAhtRaNrIeNrGeserved with CU-IDOL

Revenue and Market structure 13 TR = P × Q  But P fixation depends on the market.  Different markets have different types of P fixation .  In Perfect Competition, the market determines P, and all firms have to sell at this P. Uniform P.  In Imperfect Markets (monopoly, oligopoly and monopolistic competition), P is fixed by individual firms. . So P need not be the same for all firms in such markets www.cuidol.in Unit-8(BAQ108) All right are reserved with CU-IDOL

Revenue in Perfect Competition 14  In Perfect Competition, P is determined by the market D and S.  All firms here have to sell at the same P.  At this P there is infinite D for its product.  If any firm increases P, then it loses its customers to other firms,  There is no need to lower P, as there is infinite D at the given P.  Therefore in the short run, P remains constant in P.C. ceteris paribus www.cuidol.in Unit-8(BAQ108) All right are reserved with CU-IDOL

Total Revenue - P.C firm 15 P (Rs) Q (kgs) TR= P×Q (Rs) 10 00 10 10 1 10 10 2 20 10 3 30 10 4 40 10 5 50 6 60 www.cuidol.in Unit-8(BAQ108) All right are reserved with CU-IDOL

Total Revenue – P.C firm 16 R TR=P×q 0  As P is constant, increase in q, leads to www.cuidol.in increase in Total Revenue.  TR is thus a straight line through the origin. Unit-8(BAQ108) q All right are reserved with CU-IDOL

Average and Marginal Revenue 17 Average Revenue AR = TR/Q AR = TR= P × Q = P Q Q So AR = P. The AR curve shows the relationship between P and Q. Therefore it is also the demand curve of the firm.  Marginal Revenue MR = change in TR due to change in Q. MR = ∆TR ∆Q www.cuidol.in Unit-8(BAQ108) All right are reserved with CU-IDOL

TR, AR and MR in Perfect 18 Competition P (Rs) Q (kgs) TR= P×Q AR = TR/Q MR =∆TR/∆Q 10 0000 10 1 10 10 10 10 2 20 10 10 10 3 30 10 10 10 4 40 10 10 10 5 50 10 10 10 6 60 10 10 www.cuidol.in Unit-8(BAQ108) All right are reserved with CU-IDOL

TR, AR and MR - PC firm 19 R TR=P×q  When q=0, P=10, and remains constant, as q P =10 increases. 0  AR = MR = P for a perfectly www.cuidol.in competitive firm.  A straight line parallel to X - axis. AR=MR = d Unit-8(BAQ108) q All right are reserved with CU-IDOL

Price in Imperfect Competition 20  In imperfect markets – monopoly, oligopoly and monopolistic competition, the firm is free to fix its own P.  There is no market P, but individual Ps.  To sell more the firm has to lower its P.  Therefore the AR curve will be sloping downwards.  TR will not increase continuously, but will dip downwards after a maximum. www.cuidol.in Unit-8(BAQ108) All right are reserved with CU-IDOL

Revenue in Imperfect Competition 21 P (Rs) Q (kgs) TR= P×Q AR = TR/Q MR =∆TR/∆Q 10 1 10 10 10 9 2 18 98 8 3 24 86 7 4 28 74 6 5 30 62 5 6 30 50 4 7 28 4 -2 3 8 24 3 -4 www.cuidol.in Unit-8(BAQ108) All right are reserved with CU-IDOL

TR, AR and MR in imperfect 22 competition TR max  TR is an inverted U- shaped curve. AR is R TR downward sloping. 0  MR is also downward www.cuidol.in sloping. It lies below AR, cuts X-axis when TR is maximum, And then becomes negative. AR = d MR q Unit-8(BAQ108) All right are reserved with CU-IDOL

Equilibrium of the firm 23  How much of output should the firm produce and sell?  As Q increases, TR , but TC also .  A rational firm tries to maximise its profits, or minimise loss.  Assuming that cost curves are given,  Profit = TR – TC  This refers to all types of markets, Perfect and Imperfect. www.cuidol.in Unit-8(BAQ108) All right are reserved with CU-IDOL

Equilibrium of the firm - PC TC 24 TR R, C B R C Max Profit A 0 q1 q3 q2 q www.cuidol.in Unit-8(BAQ108) All right are reserved with CU-IDOL

Equilibrium of the firm - PC 25  As Q increases, TR and TC both increase.  Up to point A, TC > TR, so the firm runs at a loss.  At A, TC = TR, this is called the “break even” point of the firm, profits = 0.  Beyond A, TR >TC, so the firm makes profit, till point B.  At point B, again the firm makes zero profits, as TC = TR.  After B, TC > TR and the firm makes losses. This is the uneconomical zone of production. www.cuidol.in Unit-8(BAQ108) All right are reserved with CU-IDOL

Equilibrium of the firm - PC 26  How much of output should the firm produce to make maximum profits?  This will lie between points A and B.  The output that fetches it maximum profit, is the point where the difference between TR and TC is the maximum,  To find this point, draw a tangent to the TC curve that is parallel to TR curve.  This point (q3) gives the maximum profit (R- C).  This is a unique point, as no other level of output will give the firm maximum profit. www.cuidol.in Unit-8(BAQ108) All right are reserved with CU-IDOL

Equilibrium in Monopoly 27 (imperfect market)  The same principles of profit maximisation applies in all imperfect markets.  Taking monopoly as an example,  The shape of the TR curve is different in monopoly,  It is an inverted U-shaped curve. . Assuming that TC curve has the same shape, profit maximising output has to be decided www.cuidol.in Unit-8(BAQ108) All right are reserved with CU-IDOL

Equilibrium - Monopoly firm 28 R TC RB TR Max Profit AC 0 q1 q3 q2 q www.cuidol.in Unit-8(BAQ108) All right are reserved with CU-IDOL

Profit Maximisation - Monopoly Firm 29  At A and B, the firm makes no profit, as TR = TC.  As in PC, the maximum profit is the largest distance between TR and TC.  This is found at the output where the slope of the TR = slope of TC.  Shown by drawing tangents to the two curves, and locating that point where the two tangents are parallel.  Profit maximising output = q3. www.cuidol.in Unit-8(BAQ108) All right are reserved with CU-IDOL

Multiple Choice Questions 30 1. If the marginal revenue is less than the marginal cost then to profit maximize a firm should: a) Reduce output b) Increase output c) Leave output where it is d) Increase costs 2. In the long term a firm will produce provided the revenue covers: a) Fixed costs b) Variable costs c) Total costs d) Sales 3. Total revenue equals: a) Price plus the quantity b) Price multiplied by the quantity sold c) Price divided by the quantity sold d) Price minus the quantity sold 4. If marginal revenue equals marginal cost: a) No profit is being made b) Total revenue equals total cost c) Profits are maximized d) Producing another unit would increase profits Answers: 1.a) 2.c) 3.b) 4.c) www.cuidol.in Unit-8(BAQ108) All right are reserved with CU-IDOL

Summary 31  Revenue: The amount of money that a producer receives in exchange for the sale proceeds is known as revenue. For example, if a firm gets Rs. 16,000 from sale of 100 chairs, then the amount of Rs. 16,000 is known as revenue.  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).  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. www.cuidol.in Unit-8(BAQ108) All right are reserved with CU-IDOL

Frequently Asked Questions 32 Q1.Define Total Revenue? Answer: 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). Q2. What is relation between market price and marginal revenue of a price-taking firm? Answer :-For a price taking firm, market price is equal to marginal revenue because firm can sell more quantity of commodity at the same price. As a result that revenue from every additional unit (MR) is equal to price or average revenue AR Q3. Why is the total revenue curve of a price-taking firm an upward sloping straight line? Why does the curve pass through the origin? Answer :For a price taking firm, AR is constant. In case AR is constant, MR is also constant. As a result TR increases in the same proportion as price is constant. So, TR curve is upward sloping straight line. It passes from the origin because TR is zero at zero level of output. www.cuidol.in Unit-8(BAQ108) All right are reserved with CU-IDOL

REFERENCES 33 1. Ahuja, H.L.(1999). Advanced Economic Theory. New Delhi: S.Chand&Co. 2. Chopra,P.N.(1998). Micro Economic Theory and Welfare Economics. New Delhi: Kalyani Publishers. 3. Chopra,P.N.(2006). Advanced Economic Theory. New Delhi: Kalyani Publishers. 4. Lekhi, R.K., Walia, H.S. & Talwar,S.J.(2003).Micro Economics. New Delhi: Kalyani Publishers. 5. Lipsey,R.G. & Chrystal, K.A.(2004). Economics. New Delhi: Oxford University Press. 6. Mandal,R.K.(2007). Micro Economics Theory. New Delhi: Atlantic Publishers. 7. Ray, N.C.(1980). An introduction to Micro Economics. New Delhi: The Macmillan Company of India. 8. Salvatore,D. (2003). Micro Economics: Theory & Applications. New York: Oxford University Press. 9. Singh,M. (1971). MangSidhant Ate Mishrat Arth-VivsthaVich Arthik Ganana. Patiala: Punjabi University. 10. Vohra, P.& Mehta,R. (2007). Micro Economics. New Delhi: Commonwealth Publishers. www.cuidol.in Unit-8(BAQ108) All right are reserved with CU-IDOL

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