Part 4 Revenue Average Revenue Marginal

Part 4 • • Revenue, Average Revenue, Marginal Revenue Competitive Market Perfectly and Imperfectly Competitive Markets Perfectly Competitive Market Characteristics Profit, Break-even Price, Loss Supply Curve in Short-run Period Long-run Equilibrium ______________________________________ This project is co-financed by the European Union 1

Revenue generally depends on the price of the good and the quantity sold Sold quantity TR = P. Q Price of a good Total revenue ______________________________________ This project is co-financed by the European Union 2

Revenue Average revenue is a revenue per unit of output Marginal Revenue Marginal revenue is the additional revenue from producing (and selling) one more unit of output ______________________________________ This project is co-financed by the European Union 3

Competitive Market Characteristics of Perfectly Competitive Markets 1. Price taking 2. Product homogeneity 3. Free entry and exit ______________________________________ This project is co-financed by the European Union 4

Competitive Market Price taking The individual firm sells a very small share of the total market output and, therefore, cannot influence market price The individual consumer buys too small share of industry output to have any impact on market price ______________________________________ This project is co-financed by the European Union 5

Competitive Market Product homogeneity The products of all firms are perfect substitutes Free entry end exit Buyers can easily switch from one supplier to another Suppliers can easily enter or exit a market – there are no barriers for entering or exiting the market ______________________________________ This project is co-financed by the European Union 6

Competitive Market Revenue - perfectly competitive market The price is fixed (given) TR is a linear function of Q TR = P. Q ______________________________________ This project is co-financed by the European Union 7

Competitive Market Revenue - perfectly competitive market - example P=5 TR = 5 Q ______________________________________ This project is co-financed by the European Union 8

Competitive Market Characteristics of Imperfectly Competitive Markets 1. Price making 2. Product homogeneity or heterogeneity 3. Entry barriers ______________________________________ This project is co-financed by the European Union 9

Competitive Market Price making The firm is large enough (has a significant market power) to adjust the prices The individual consumer still buys too small share of industry output to have any impact on market price (The opposite is a monopsony but we neglect this here ) ______________________________________ This project is co-financed by the European Union 10

Competitive Market Product homogeneity or heterogeneity 2 extremes: - the products of all firms are perfect substitutes - no substitute exists Entry barriers There are significant entry barriers like high entry cost, license etc. ______________________________________ This project is co-financed by the European Union 11

Competitive Market Revenue - imperfectly competitive market The firm is able to change the price The price is changing with demanded quantity ______________________________________ This project is co-financed by the European Union 12

Competitive Market Revenue - imperfectly competitive market - example ______________________________________ This project is co-financed by the European Union 13

Competitive Market Demand - perfectly competitive market Perfectly elastic demand P ______________________________________ This project is co-financed by the European Union 14

Competitive Market Demand - imperfectly competitive market ______________________________________ This project is co-financed by the European Union 15

Profit of the firm is a difference between total revenue and total cost maximize ______________________________________ This project is co-financed by the European Union 16

Perfectly Competitive Market Short run Profit-maximizing firm will produce at the level of output Q 0 ______________________________________ This project is co-financed by the European Union 17

Perfectly Competitive Market Short run – economic profit π Profit per unit of output ______________________________________ This project is co-financed by the European Union 18

Perfectly Competitive Market Short run – break-even price ______________________________________ This project is co-financed by the European Union 19

Perfectly Competitive Market Short run – economic loss STAY SHUT DOWN ______________________________________ This project is co-financed by the European Union 20

Perfectly Competitive Market Short run – loss of fixed cost Fixed cost ______________________________________ This project is co-financed by the European Union 21

Perfectly Competitive Market Short run – loss greater than fixed cost Fixed cost ______________________________________ This project is co-financed by the European Union 22

Perfectly Competitive Market Short run – supply curve ______________________________________ This project is co-financed by the European Union 23

Perfectly Competitive Market Long run Profitable market Entry of new firms S 0 S 1 Q 0 Q 1 P 0 P 1 π=0 ______________________________________ This project is co-financed by the European Union 24

Perfectly Competitive Market Long run equilibrium P = LMC P = min LAC ______________________________________ This project is co-financed by the European Union 25