This document provides an overview of managerial economics concepts including revenue, costs, profits, and market structures. It discusses how economists and accountants measure costs and profits differently. Firms exist to maximize profits by producing where marginal revenue equals marginal cost. The equilibrium level depends on the relationship between average cost, marginal cost, and marginal revenue curves. Imperfect market structures like monopoly and monopolistic competition are also introduced.

1. Managerial Economics
Revenue & Revenue Curves
Dr. Qais Aslam

2. Economic and Accounting Profit
• Economists includes all opportunity costs when
analysing a firm
• Accountants measure only explicit costs
• therefore economic profits are smaller than the
accountants profits
• Implicit costs: external costs and opportunity costs
• explicit cost: costs of production incurred by the
producer

3. Revenue and Profits
• A firms revenue is the amount of money received
after selling a unit of output in the market
• Firm exists in the market only for profit motive
Revenue – Costs = Profits
• Or
MR = MC
• Where the MC curve intersects MR from below

4. Average and marginal Revenue
•Average revenue (AR = D) = total
revenue divided by quantity sold
(TR/Q) or the demand curve of the
firms product in the market (D)
•Marginal Revenue (MR) the change
in total revenue from an additional
unit of output sold
MR = ∆TR/∆Q

5. AR (D) = MR
E
P
MC
Q
AC1 Loss (AC > MR)
AC2 normal profit AC =MR)
AC3 super normal
Profit (AC < MR)

6. • Revenue of a Small Firm Under Perfect Competition will
come from Market Price where Market Demand
intersects the Firm’s supply curve (Price Taker)
• As all demand, supply, price and other factors in the
market are constant in the short run, therefore the
Average Revenue of the Small Firm under Perfect
Competition will be a straight line parallel to the
horizontal axes.
• Marginal Revenue shows the rate of change in Total
Revenue. As there is no rate of change in TR because it
is a n upward sloping straight line, therefore MR of a
small firm under perfect competition in the short run
will also be a straight line parallel to horizontal axis and
will fall on the AR curve

7. Equilibrium level of a Firm
• MC = MR
• .
∆𝑇𝐶
∆ 𝑞
=
∆𝑇𝑅
∆ 𝑞
• MC curve intersects MR from below
• It is Recommended for the firm to produce at point E,
because before E profits are rising and Marginal costs
are below Marginal Revenue.
• After E Marginal costs are above Marginal revenue
therefore there would be losses to the firm
• Point E is the optimum production point of any firm
• Profits; Normal Profits or Losses to a firm will depend
upon the least cost position of the Firm which is (AC =
MC)

8. 1. If AC curve intersects MC curve below point E. there
would be super-normal profits of PrEAPc rectangle,
because least costs of the firm are less than revenue of
the firm
2. If AC curve intersects MC curve at point E where MC
curve intersects MR curve from below the firm takes
only normal profits, because this is a break even point
and all costs are being met of the firm (AC = MC = MR =
AR = Market Price = Market Demand = Market Supply)
REAC is the amount of super normal profits
3. If AC curve intersects MC curve above point E, than Costs
are more than revenue and the firm will incur losses to
the extent of PcBEPr because the costs of the firm are
greater than its revenue
• In the Long Run, firms that take losses will go out of the
market. Firms that take profits will have competition from
new firms with better technology, machines, technique,
processes, skills and know how. Therefore all firms will
take Normal Profits in the long run

9. Monopoly
• Is a market situation where the sole seller of a product and
has no close substitutes
• Monopsony is where there is a sole buyer in the market
• Natural monopoly arises because a single firm can supply
goods or services to an entire market at a smaller cost than
two or more firms this happens when a firms average-total-
costs curve declines over a longer period of time.
• Government created monopolies arise because government
have given one firm the excusive rights to sell some goods
or services
• Monopoly Restricts free flow of information
• Monopoly Restricts free entry of new firms
• Monopoly Restricts free mobility of factors of production

10. Welfare cost of monopolies
• A firm charges monopoly price which is over and above the marginal
costs and monopoly profits arise.
• At monopoly price not all consumers who value the goods at more than
its costs buy it and this reduces the consumer surplus. Higher monopoly
supply price reduces consumer’s surplus but increases the producer’s
surplus
• The quantity produced and sold by the monopolist is below the socially
efficient levels (Below the market price under perfect competition)
• The deadweight loss reflects the costs of monopoly production
• (managers who manage monopolies usually are not entrepreneurs and
therefore increase wastages by their inefficient behaviors)
• Monopolies are large firms and therefore usually are inefficient,
because they are making profits due to lack of competition and
therefore do not work at their efficient cost levels
• Under Monopoly Price increases while quality decreases therefore
Firms gain while consumers usually lose

11. Monopolistic Competition &
Oligopoly
• Monopolistic Competition is a market structure in
which many firms sell products that are similar but
not identical
• Oligopoly is a market structure in which only a few
sellers offer similar products or identical products
• Collusion is an arrangement among firms in a
market about quantities to produce or prices to
charge
• Cartel is a group of firms acting in unison on supply
or price

12. MR
AR (D)
AC
MC
Super-Normal
Profits
Demand and
revenue
Costs
Profits under Imperfect market conditions

13. • If the Monopolist (large Firm = Price Maker) increases the
supply price of his commodity, than the Average Revenue of
the Firm which is the market Demand curve of the firm will
fall as price rises. Therefore The AR (D) curve will be a
downwards sloping curve
• The MR curve of the Large Firm will also be down ward
sloping, but the MR will fall below AR curve
• The distance between the two curves as well as the slope of
AR (D) curve will show the elasticity of demand for the
commodity
• The firm will produce at point E where MC = MR and sell at
point A on the AR (D) market demand curve. Therefore
PrAEPc are super Normal profits of a Monopolistic Firm
• These Profits will depend upon (a) Elasticity of Demand
(slope of the AR (D) curve) and (b) least costs of the firm AC =
MC

14. Product differentiation and Price
discrimination
• Product differentiation: Firms change the shape,
color, fragrance, brand name, shape, wrapping of
the product to charge different prices at different
markets
• Price Discrimination: Firms charge different prices
for the same product in different markets
• Advertisement: Advertisement and marketing are
tools of monopolistic firms to attract buyers
towards their products. Advertisements increase
revenues but increase costs also
• Kinked demand curve:

15. Ten Principles of Economics
1. People Face Tradeoff’s
2. There are Opportunity Costs to every Decision
3. Rational People think on the Margin
4. People Respond to Incentives
5. Trade Increases Welfare of all
6. Markets are efficient
7. Governments can increase efficiency of the market
8. Production of Goods and services increases Incomes
and wealth
9. Increase in incomes increases inflation and prices
10. Short-term tradeoff’s have to be made between
inflation and employment
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