1. Production, Costs & Revenue - MR, AR & TR

Question 1

In which two market structures will revenue curves look different?

Answer 1

Perfect competition markets & Imperfect competition markets

Question 2

What conditions differentiate perfectly and imperfectly competitive markets?

Answer 2

Perfectly competitive markets have; homogenous goods, perfect information, many buyers and sellers, no barriers to entry/exit so firms are price takers - imperfectly competitive markets don’t have these

Question 3

How do we work out TR?

Answer 3

P x Q

Question 4

How do we work out AR?

Answer 4

TR/Q

Question 5

How do we work out MR?

Answer 5

MR = extra revenue brought in from selling one more unit of a product

Question 6

What goes on each axis for a revenue diagram?

Answer 6

Y axis = Price & RevenueX axis = Output

Question 7

What does the AR, MR & Demand curve look like in a perfectly competitive market?

Answer 7

All 3 things are shown by one, horizontal perfectly elastic curve - this line also shows the price

Question 8

Why is the AR, MR, D curve totally elastic in a pc market?

Answer 8

Bc the firm is a price taker - they can’t increase or decrease there price at all - therefore every unit is sold for the same price - so MR = AR = D

Question 9

What does the AR, MR & Demand curve look like in an imperfectly competitive market?

Answer 9

AR still = D and this becomes a linear downward sloping line - this is bc the firm now has price making powerAR also = PriceMR is now separate to AR & D - it is a linear downward sloping line which is twice as steep as the AR curve

Question 10

Why is the MR twice as steep as the AR curve?

Answer 10

Bc if firms want to sell one more unit of something they have to decrease there prices for every previous unit not just the extra one

Question 11

What does total revenue look like in a perfectly competitive market and why?

Answer 11

TR will be an upward sloping linear line - increasing at a constant rateThis is bc in a perfectly competitive market MR is constant - each extra unit sold at the same price so TR will rise with output at a consistent rate also

Question 12

What does total revenue look like in an imperfectly competitive market and why?

Answer 12

TR will be a u-shaped curve that slopes upward and peaks at the point MR = 0 and gradually falls after that pointThis is bc as long as MR is above 0 TR will be rising - however MR is downward sloping so MR will be increasing but the rate at which its increasing will be decreasing until MR falls below 0 at which point TR begins to fall