Market and Revenue Curves

Market
• A market is a mechanism that brings together buyers and sellers of particular goods or
services
or
• Market is an arrangement that allows buyers and sellers to exchange goods and services.
• Essential elements of market
• A commodity
• Buyers and sellers
• A place
• Contact between buyers and sellers
Kinds of Market
• 1. According to period of time
• Daily Market: fixed supply e.g. perishable goods
• Short Period Market: supply adjustment within productive capacity
• Long Period Market: supply adjustment even after productive capacity to fulfil demand
• 2. Markets According to Location
• Local Market: Limited market where goods produced and sold are difficult to transport
e.g. bricks, bread, fresh milk etc.
• Regional Market: market where goods produced and sold in a particular region due to
lack of demand in other regions e.g. Sindhi-Shawal, handicrafts, etc.
• National Market: Market extended to the whole country and goods can be transported
e.g. wheat, bulbs, cloth
• International Market: market spreads to more than one country or the whole world.
Goods can be produced on large scale e.g. cars, computers, gold, oil, etc.
Kinds of Market
• 3. Markets According to Nature of Commodity
• General Market: all kind of goods are sold in market e.g. Kamoki Mandi in Gujranwala,
Anarkali in Lahore
• Specialized Markets: particular commodity sold and bought e.g. Azam cloth market for
clothes, gold market, Urdu Bazar (books market) in Lahore
• Marketing through Samples: goods sold by providing samples, e.g. medicines, grains
• Marketing through Grades: goods sold on the bases of trade marks, e.g. SONY TV,
Honda Bike, BATA shoes.
• 4. e-market
Marketing commodities or services over the internet through e-mails, also called
online marketing. Extremely low cost to reach customers.
Kinds of Market
• 5. Markets According to the Nature of Competition
• i. Perfect Competition
• ii. Pure Competition
• Imperfect Market (Absence of perfect market)
• A. Monopoly (Single Seller)
• B. Oligopoly (Small number of firms)
• C. Monopolistic Competition (many firms selling technical and economic substitutes)
• Rarely stated Kinds of Imperfect Market
• B. Monopsony (Single Seller and Single buyer)
• C. Duopoly (Two Sellers of homogeneous (identical) goods)

• Note: Normally the nature of competition is the most important kin of market economist focuses on.
Perfect Competition (Perfect Market)
• A market where single buyer or seller cannot influence the price of commodity.
• A market is perfect if it follows these conditions
• Very large number of buyers and sellers
• Homogeneous product: identical and indistinguishable goods
• Free entry and exist
• Perfect Mobility of Factors
• Perfect knowledge
• No Transportation Cost of commodities
• Advantages of Perfect/Pure Competition
• Producer use efficient method of production
• Consumer get commodity at cheaper price
• Factors of production get good rewards
Pure Competition
• involves a very large number of firms producing a standardized product (that is, a product
like cotton, for which each producer’s output is virtually identical to that of every other
producer.) New firms can enter or exit the industry very easily.
• Pure competitive market follows these conditions
• Very large numbers of Buyers and sellers
• Standardized product (identical or homogeneous)
• Price takers (both producers and consumers)
• Free entry and exit

• Note: technically there are only 2 characteristic difference in the pure and perfect
competition; perfect knowledge and no transportation cost. All else characteristics of both
the competition are the same. So their demand and revenue curves are also the same.
Monopoly
• Monopoly is a market structure in which one firm is the sole seller of a product or service
(for example, a local electric utility). Since the entry of additional firms is blocked, one firm
constitutes the entire industry. The pure monopolist produces a single unique product, so
product differentiation is not an issue.
• Single producer (Single firm) controls supply of commodity
• Seller is price maker
• Price or quantity can be fixed
• No close substitutes of the product
• Blocked entry: Barriers in entry of new firms(patents, supply of raw material, govt.
obligations)
• Non-price competition: The product produced by a pure monopolist may be either
standardized (as with natural gas and electricity) or differentiated (as with Windows or
Frisbees). Monopolists that have standardized products engage mainly in public
relations advertising, whereas those with differentiated products sometimes advertise
their products’ attributes.
Monopolistic Competition
• Monopolistic Competition is characterized by a relatively large number of sellers
producing differentiated products (clothing, furniture, books). Present in this model is
widespread non-price competition, a selling strategy in which a firm does not try to
distinguish its product on the basis of price but instead on attributes like design and
workmanship (an approach called product differentiation). Either entry to or exit from
monopolistically competitive industries is quite easy.
• Characteristics of Monopolistic competition
• Large number of sellers
• Differentiated products (non-homogenous, brands)
• Advertisement
• Easy entry and exist
• Product group: technical and economic substitutes
• Different prices: each firm has unique price for its products (some degree of monopoly
but not much market power)
• Small market share of products
Oligopoly
• Oligopoly involves only a few sellers of a standardized or differentiated product, so each
firm is affected by the decisions of its rivals and must take those decisions into account in
determining its own price and output. For example helicopter, gold, silver, oil extracting
companies.
• Major characteristics of Oligopoly
• Few large producers
• Homogenous or differentiated products
• Control over price but mutual independence
• Large Entry barriers: high capital cost, economies of scale
• Mergers: firms merging into large firms, e.g. banking
Characteristic of four Basic Market Models
Rarely stated Kinds of Imperfect Market
• Duopoly
• A market in which two firms control supply of a commodity. Both firms sell
homogenous products and can compete on either price or quantity.
• Major characteristics of Duopoly
• Two firms controlling supply of the product
• Homogenous goods
• Highly interdependent on price and quantity supplied
• Difficult to enter the market (patents, supply of raw material, govt. obligations)
• Monopsony
• A market where the seller is only one buyer and one seller. So, the price is settled by
the bargaining between the buyer and seller. It happens in case of sensitive goods like
weapons for defense (rockets, bombs, fighter planes, etc.)
Revenue of a Firm
• Revenue is the money received by selling the output. Important revenue concepts are:
• Total Revenue (TR): The total amount received by a firm by selling the whole output
produced within a given time (TR= Price*Quantity).
• Marginal Revenue (MR): Net addition in total revenue by selling an extra unit of output.
(MR=Change in TR/Change in Output)
• Average Revenue (AR): AR is the per unit revenue obtained by dividing TR by number of
units of output produced (AR=Total Revenue/Total Output units).
• Price is always equal to Average Revenue.( as price tell the average amount of money
received per unit sold of commodity which is similar to AR)
• Revenue curves are different based on competition in the market.
Revenue and Demand Curves of Pure/Perfect Competition
• All firms are price takers (have no market power) so they have to sell commodities
on a particular price that remains the same no matter
how much commodities they sell.
• MR is similar for all the goods because the price of
commodities remains the same for all units of goods
• MR, AR and price are equal
• The demand curve (AR) is infinitely elastic(horizontal) so the sellers can
sell as much commodities as they like on fixed price
• Since per unit revenue is the same TR is linear and
increase with the same slope that is price of the
commodity sold at every level of output.
Revenue and Demand Curves of Monopolist
• Monopolist has full control over the price of his
product and can alter price by controlling supply of
good (offering more or less to sale)
• If production increase supply increase and then price
decrease.
• As the supply increase both MR and AR falls (due to
increase in supply and decrease in prices)
• Demand curve (AR) is downward slopping indicating that the rise in price would decrease
the demand of the product but AR less elastic that increase the market power of
monopolist (proportional change in demand in less than proportional change in price)
• At every level of output AR is above MR
• TR first increase then reaches maximum when MR becomes zero and then TR decreases.
Revenue and Demand Curves of Monopolistic Competition
• Many firms in the market offering products that are both technical (cover same want) and
economic (having similar or near prices) substitutes.
• Firms have little monopolistic power and can choose
prices for their products but these prices must not be
very high because the firm will lose its customers then.
• Both MR and AR curves are more elastic than the
Monopolistic firm because the close substitutes are in
the market for sale that makes the demand of products sensitive to price of the product.
• Demand curve (AR) is downward sloping indicating quantity demand would decrease by
increase in prices.
• AR (demand curve) is elastic means a small change in price of commodity brings a large
change in quantity demanded which limit the market power of firms.
• Supply of other firms do not bring large changes in market supply as the differentiated
goods are there in the market.
Revenue and Demand Curves of Oligopoly
• There are few large firms in the market so the supply of firms is interdependent. Therefore
we have two kind of demand curves.
• 1. Demand curve of the firm (AR of the firm): it indicates the quantity of the product of
firm people are willing to buy at different prices. It is more elastic than monopoly but less
elastic than the monopolistic competition.
• 2. Market Demand: total quantity demanded for
the product in market produced by all the firms
at different prices.
• MR and AR both are downward sloping indicating
that with increase in supply the revenue of the firm
decreases. So the firms do not maximize revenue
but maximize their profits
• Supply of other firms is crucial as it would bring
large changes in market supply