Me 6


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Me 6

  1. 1. MANAGERIAL ECONOMICS MODULE 6 BY Mr. Anirban Christ College Institute of Management Bangalore
  2. 2. TR, MR & AR <ul><li>Total revenue: </li></ul><ul><li>The TR represents the total earnings of a rational producer, at a given period of time by the unit combination of price & quantity. </li></ul><ul><li>So TR = P x Q. </li></ul><ul><li>Under perfect competition price taker, price of the product is constant, which is market determined. </li></ul><ul><li>A competitive seller can sell any amount of product at a fixed market determined price, so TR must be +vely sloped straight line from the origin. </li></ul><ul><li>Under monopoly price maker, price of the product is variable, i.e. lowering the price the monopolist can sell higher output, as both the forces are moving opposite direction, so TR must be a +vely sloped curvature concave to the Q axis from the origin. </li></ul><ul><li>Let the demand function is Q = f (P), where the linear form can be written as Q = a + Bp, where a>0 , b<0 </li></ul><ul><li>So P = Q (1/b) – a/b and so TR = Q 2 (1/b) + (- a/b) Q, the TR curve must be +vely sloped curvature from the origin. </li></ul>
  3. 3. TR, MR & AR <ul><li>Average Revenue Curve: </li></ul><ul><li>AR represents per unit of revenue, i.e. AR = TR/Q = P.Q / Q = P </li></ul><ul><li>So Equation of AR = Q (1/b) – a/b. </li></ul><ul><li>From the equation we can discuss the following characteristics of AR, </li></ul><ul><ul><li>Slope of AR Curve = (1/b) < 0 </li></ul></ul><ul><ul><li>Intercept = (-a/b) >0 </li></ul></ul><ul><ul><li>So AR starts from +ve vertical intercept. </li></ul></ul>
  4. 4. TR, MR & AR <ul><li>Average Revenue Curve: </li></ul><ul><li>MR represents the last unit revenue, i.e. MR = d/dq (TR) = d/dq [ Q 2 (1/b) + (- a/b) Q] = (2/b)Q + (-a/b) </li></ul><ul><li>The characteristics of the above equation will be as follows : </li></ul><ul><li>It must be a straight line. </li></ul><ul><li>Negatively sloped (= 2/b <0) </li></ul><ul><li>It starts from +ve vertical intercept.(=-a/b >0) </li></ul>
  5. 5. AR & MR <ul><li>When AR and Mr. both are in linear form, </li></ul><ul><ul><li>The intercept of AR line = -a/b = intercept of MR line, so both the lines starts from same +ve vertical intercept. </li></ul></ul><ul><ul><li>Slope of AR = 1/b & Slope of MR = 2/b, any perpendicular drawn from AR line to the vertical axis must be bisected by the MR line where BC = CD. </li></ul></ul><ul><li>When AR and Mr. both are in linear form, </li></ul><ul><ul><li>When the AR curve is convex to the origin, the MR curve will be close to the vertical axis where BC < CD. </li></ul></ul><ul><ul><li>When the AR curve is concave to the origin, the MR curve will be closer to the AR curve BC > CD. </li></ul></ul>
  6. 6. Perfect Competition <ul><li>Large no of buyers and sellers. </li></ul><ul><li>Homogeneous product, which mean they are perfectly divisible or substitute to each other. </li></ul><ul><li>Price of the product are constant which are market determined. </li></ul><ul><li>Free entry or exist of firms in the INDUSTRY. </li></ul><ul><li>Basic objectives of a firm is profit maximization which can be achieved by sales promotion. </li></ul><ul><li>No Government restrictions. </li></ul><ul><li>Absence of advertisement and selling cost. </li></ul><ul><li>Absence of “ Non price competition” </li></ul><ul><li>Sellers are not organized. </li></ul><ul><li>Transportation cost is nil. </li></ul><ul><li>Price of the commodity, Product cost etc… should be known by the sellers and the buyers both. </li></ul><ul><li>The inputs of the production are continuous in nature. </li></ul><ul><li>The Firm is the price accepter and the industry is the price determiner. </li></ul>
  7. 7. Perfect Competition <ul><li>Equilibrium Condition: (Short Run Equilibrium) </li></ul><ul><li>The profit equation can be written as, Profit = TR – TC = P c .Q – TC (As P is constant) </li></ul><ul><li>Necessary Condition: </li></ul><ul><li>d(Profit)/ dq = d/dQ (TR – TC) = 0, i.e. P c = MC = MR </li></ul><ul><li>Sufficient Condition: </li></ul><ul><li>d 2 /dQ 2 < 0, i.e. d/dQ (P c - MC), i.e. d/dQ (- MC) < 0, i.e. Slope of the MC curve > 0 , i.e. Slope of the MC curve >0, So at equilibrium MC must be rising. </li></ul>
  8. 8. Monopoly Market <ul><li>Monopoly is said to be exist when one firm is the sole produces or seller of a producer or seller of a product which has no close substitutes. </li></ul><ul><li>From the above three points are worth noting in this definition : </li></ul><ul><ul><li>There must be only one single producer or seller of the product. </li></ul></ul><ul><ul><li>No close substitute of the product should be available. </li></ul></ul><ul><ul><li>Strong barriers to the entry of the firms into the Industry exists. </li></ul></ul>
  9. 9. Monopoly Market <ul><li>Characteristics: </li></ul><ul><li>Single seller and large no of buyers. </li></ul><ul><li>The product has no close substitute. </li></ul><ul><li>Price of the product is variable. </li></ul><ul><li>The concept of entry and exist is blocked by definition. </li></ul><ul><li>The concept of firm and industry is synonymous. </li></ul><ul><li>The basic objectives is profit maximization. </li></ul><ul><li>Government control may exist. </li></ul><ul><li>Advertising or selling cost may exist where the basic target of the advertisement is welfare maximization. </li></ul><ul><li>As the monopolist is the only seller in the market, so supply of the goods in the market is fully controlled by the marketer. </li></ul>
  10. 10. MONOPOLY <ul><ul><li>Equilibrium Condition: </li></ul></ul><ul><li>The main objectives of any firm is profit maximization where, </li></ul><ul><ul><li>Profit = TR – TC = R(q) – C(q) </li></ul></ul><ul><li>Necessary Condition: </li></ul><ul><li>d/dq (profit) = 0, i.e. MR = MC </li></ul><ul><li>Sufficient Condition: </li></ul><ul><li>d 2 (Profit)/dq 2 < 0, i.e. Slope of MR < Slope of MC, i.e. MC cuts MR from below. </li></ul>
  11. 11. Monopolistic Market <ul><li>The concept of monopolistic competition has been introduced in the literature by Prof. Chamberlin. </li></ul><ul><li>The important characteristics of the Monopolistic competition are as follows: </li></ul><ul><li>There are large no of sellers and buyers but not like perfect competition. </li></ul><ul><li>Each seller produces differentiate product which is different from the product of others but which is close substitute to each other. </li></ul><ul><li>Selling cost or advertisement cost are necessary in M.C. </li></ul><ul><li>Free entry or exist is there. </li></ul><ul><li>Group is used in place of Industry. </li></ul><ul><li>The objective of the firm is profit maximization. </li></ul><ul><li>The price of the inputs and technology is given. </li></ul><ul><li>Demand and Cost function known certainly. </li></ul><ul><li>All the firm in the group have identical demand and cost function. </li></ul><ul><li>Prof. Chamberlin distinguishes two types of demand curves faced by an individual firm, Actual or proportional demand curve (DD) and Expected demand curve or pre received demand curve (dd). </li></ul><ul><li>Existence of non price competition. </li></ul>