Revenue theory and market structures

Question 1

Profit

Answer 1

= revenue - cost

Question 2

Revenue depends on

Answer 2

Competitiveness of firms market structure.

Question 3

Perfect competition

Answer 3

An unreal economic model:
Define by 6 conditions...
1: Large number of buyers and sellers
2: perfect market information
3: able to buy/sell as much as they wish at the ruling market price
4: unable to influence the ruling market price
5: uniform product
6: no barriers to entry or exit
PRICE TAKERS

Question 4

Various forms of imperfect competition

Answer 4

1: Monopolistic competition = IMPERFECT COMPETITION AMONGST THE MANY
2: Oligopoly
3: Duopoly

Question 5

Oligopoly

Answer 5

• A few mutually interdependent firms
• Need to take account of its rivals’ reactions when deciding its own marketing strategy.
  IMPERFECTION COMPETITION AMONGST THE FEW

Question 6

Monopoly

Answer 6

Pure monopoly:
- 1 firm
- 100% of market production
PRICE MAKER
- most extrem form of imperfect competition
- no competition
- usually relative rather than absolute concept

Question 7

Monopoly example

Answer 7

• Until recently, British Gas Corporation - single producer of piped fas to households and most industrial consumers.
• Faced competition from other sources eg. electricity and oil
• Monopolists therefore do face competitive pressures from substitute products and sometimes also from outside firms to enter market to destroy their monopoly position.

Question 8

Revenue

Answer 8

Money income a firm receives from selling its output.

Question 9

Marginal revenue

Answer 9

The addition to total revenue from the sale of one more unit of output.

Question 10

Revenue Curve - Perfect competition

Answer 10

Price taker
- Firm raise selling price, customers desert price to buy identical products (perfect substitutes) available at market price. (Substitutability, perfectly elastic demand for firms output)
- Selling below ruling market price, reduces total sales revenue and profit.
Conflicts with profit maximising objective
D = AR = MR

Question 11

Revenue Curve in a Monopoly: AR & MR

Answer 11

• D = AR… as the demand curve shows the price the monopolist charges at each level of output.
• Unlike perfect competition, AR does not = MR
  Since monopolist’s AR falls as output or sales rise, MR must be below AR.
• Can only sell an unit of output by reducing the price at which all units are sold as downward sloping.
• PED falls moving down the demand curve.

Question 12

Revenue Curve - Monopoly: Price maker

Answer 12

Set price, demand dictates maximum output.

Only is monopolist successfully uses advertising or marketing to shift demand curve to right.

Question 13

Revenue Curve - Monopoly: Quantity-setter

Answer 13

Demand curve dictates the maximum price at which the chosen quantity can be sold.

Question 14

Monopolist trade off

Answer 14

Monopoly cannot set price and quantity independent of each other.