Market Structure (Module 1)

OLABISI ONABANJO UNIVERSITY, AGO-IWOYE, NIGERIA
FACULTY OF SOCIAL SCIENCES
DEPARTMENT OF ECONOMICS

ECO 212: INTRODUCTION TO MICROECONOMICS II
TOPIC: CONCEPT OF REVENUE AND MARKET STRUCTURE (MODULE 1)

LECTURER: DR. I.A. ODUSANYA
CONCEPT OF REVENUE
 Revenue simply refers to the income realized from

sales. A firm's revenue are all incomes it receives
from the sale of its goods and services.
 Every rational producer aims at maximising his
profit. Hence, he ensures his revenue exceeds
costs.
FORMS OF REVENUE
The three forms of revenue are:

 Total revenue (TR)
 Average revenue (AR)
 Marginal revenue (MR)
Total Revenue
This refers to the entire incomes realized from all sales.

TR = Price x Quantity = PQ
Therefore, total revenue varies directly with the firm's
sales volume.
Average Revenue
 This

is the sales or revenue per unit of output. Average
revenue (AR) equals the unit price.
 Therefore, any curve relating revenue to output is

the same as the demand curve which relates price
to output.
Marginal Revenue
 This

is the extra amount of revenue realized from
extra unit of goods sold.
 It is therefore obtained as the change in total
revenue divided by the change in quantity sold.
Profit and Revenue

 Profit = Total Revenue - Total Cost i.e. TR-TC
 A firm incurs loss when total cost exceeds total revenue
 Breakeven point occurs when total revenue equals total cost.

Relationship between Average Revenue and
Marginal Revenue
 Therelationship between average revenue and marginal

revenue is the same as the relationship between any other
average and marginal values.
 When average revenue remains the same, average
revenue is equal to marginal revenue.
 When average revenue falls, marginal revenue is less than
the average revenue.
Relationship Between Marginal Revenue and Price
Elasticity of Demand

 A verysimple but interesting relationship exists between marginal
revenue and the price elasticity of demand. This relationship could
be expressed mathematically as:
 Where MR refers to marginal revenue, P denotes price, and

denotes price elasticity of demand.
Relationship Between Marginal Revenue and Price
Elasticity of Demand
When the numerical values of the price elasticity of demand are substituted
into the mathematical expression above, then any of the following could arise:
a) When Ed = 1, MR = 0
b) When Ed < 1, MR < 0
c) When Ed > 1, MR > 0
d) When Ed = ∞, MR = P (This is peculiar to a perfectly competitive market)

MARKET STRUCTURE
 Market is defined as any arrangement in which buyers

and sellers get in touch with each other to exchange goods
and services using money or its equivalence as a medium
of exchange.
 The means of contact could be in a geographical location,
through modern communication such as telex, fax,
telephone, telegram, e-mail, etc.
Classifications of Market
 There are various classifications based on goods bought and sold

e.g. product/commodity market, labour market, money market and
capital market (financial market), foreign exchange market etc.
 Classification is also based on distribution channel (retail market
and wholesale market).
 When classification is based on price determination, the market is
divided into 2 broad categories: perfect market (or perfect
competition) and imperfect market.
Perfect Market or Perfect Competition
 A perfect market is a market structure in which the

price level is completely influenced by the forces
of demand and supply.
 Itis a market organisation characterised by a
complete absence of rivalry among the individual
producers or firms.
Assumptions of Perfect Market
 There are large numbers of buyers and sellers.

 The products sold in the market are homogeneous.
 There is perfect mobility of resources without any
impediments or any restriction whatsoever.
 There is perfect knowledge of all relevant information relating to the market. All
buyers and sellers have adequate knowledge of existing market conditions.
 There is free exit and entry of firms into the industry.
 There is no preferential treatment in buying and selling since there are many
buyers and sellers as well as a perfect knowledge about the price prevailing in
the market.
 The firm is a price taker i.e. it takes the price as dictated by the
forces of demand and supply in the market or industry.
 There is no government intervention, in form of subsidies, etc.
 Each firm is faced with perfectly elastic supply and demand curves.
Demand Curve of a Perfect Competitor
Price and Output Determination under Perfect
Competition
 Each firm is faced with perfectly elastic supply and

demand curves while the industry is faced with unitary
elastic supply and demand. The reason for the perfectly
elastic status of the firm is that individual firm is a price
taker i.e. price is fixed.
 A perfectly competitive firm achieves its maximum profit
at the output level where the marginal revenue (MR) is
equal to the marginal cost (MC). Since a perfect
competitor aims at maximizing profit, he tries to attain
this level of output where MC = MR = P= AR.
SHORT-RUN EQUILIBRIUM OF A PERFECTLY
COMPETITIVE FIRM
SHORT-RUN EQUILIBRIUM OF A PERFECTLY
COMPETITIVE FIRM
 The shaded area depicts the profit (π) of the firm when it
produces output Q*. The rectangle A0Q*e represents the
total revenue (TR) and ABCe is the total cost (TC).
 The firm earns positive economic profit in the short-run.
LONG-RUN EQUILIBRIUM OF A PERFECTLY
COMPETITIVE FIRM
 New firms enter into the industry due to the existence of positive
economic profit. Consequently, there is an increase in market
supply in the industry in the long run.
 During this period, there is a continuous fall in the market price
which results into eventual elimination of all economic profits.
 Hence, a perfectly competitive firm earns zero economic profit or
normal profit in the long run.
LONG-RUN EQUILIBRIUM OF A PERFECTLY
COMPETITIVE FIRM
Loss of A Perfectly Competitive Firm
Monopoly
 Monopoly is the form of market organization in which there is a

single firm producing a commodity for which there is no close
substitute.
 Unlike a perfectly competitive firm that is a price taker, monopolist
is a price setter being the only firm in the industry.
 He can reduce his output thereby increasing price. He can also
increase output in a bid to reduce price.
Monopoly
 Monopoly could arise through merger and acquisition,

ownership of strategic/key resources, granting of
exclusive business license to an individual or firm by the
government, issuance of patent and copyright, sole
ownership by the government, etc.
 Monopoly could be pure, price discriminating or multi-
plant.
Features of Monopoly
1. One seller in the industry/ market.

2. Entry in the market is blocked.
3. The product has no close substitute.
4. The firm is a price setter i.e. the firm has control over the
price but do not control both price and output at the same
time.
Demand Curve of a Monopolist
Price and Output Determination under Monopoly
 The

monopolist attains equilibrium at the point where MR
= MC in the short run. The output at this point is Q* i.e.
the profit-maximising output.
 The total revenue of the firm is given by rectangle the
total cost is denoted by rectangle while the shaded area
indicates the profit of the monopolist.
Short Run Equilibrium of a Monopolist
Long Run Equilibrium of a Monopolist
Long Run Equilibrium of a Monopolist
 In the long run, the monopolist maximizes profit at an output level

where long run marginal cost (LMC) is equal to the marginal
revenue. If there is still existence of barrier to entry and price
remains higher than long run average cost (LAC), then the
monopolist will continue to earn positive economic profit in the
long run.
 Hence, the condition for profit maximisation remains the same in
the long run once the firms still operate as a monopolist.
Price Discrimination by a Monopolist
This exists when the same product is sold at different prices to different buyers,
usually in different market.
The conditions for a successful price discrimination include:
1. Separation of the market by reasonable distance to guide against resale of
product.
2. Degree of price elasticity of demand
3. Imperfect knowledge of the buyers
4. Product differentiation e.g. differences in locations/tickets for seats in the
cinema, stadium, airplane, etc.

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OLABISI ONABANJO UNIVERSITY, AGO-IWOYE, NIGERIA

FACULTY OF SOCIAL SCIENCES

TOPIC: CONCEPT OF REVENUE AND MARKET STRUCTURE (MODULE 1)

 Revenue simply refers to the income realized from

The three forms of revenue are:

This refers to the entire incomes realized from all sales.

 Therefore, any curve relating revenue to output is

 A firm incurs loss when total cost exceeds total revenue

 Breakeven point occurs when total revenue equals total cost.

 Therelationship between average revenue and marginal

 Where MR refers to marginal revenue, P denotes price, and

b) When Ed < 1, MR < 0

c) When Ed > 1, MR > 0

d) When Ed = ∞, MR = P (This is peculiar to a perfectly competitive market)

 Market is defined as any arrangement in which buyers

 There are various classifications based on goods bought and sold

 A perfect market is a market structure in which the

 There are large numbers of buyers and sellers.

 There is free exit and entry of firms into the industry.

 There is no government intervention, in form of subsidies, etc.

 Each firm is faced with perfectly elastic supply and

 Monopoly is the form of market organization in which there is a

 Monopoly could arise through merger and acquisition,

1. One seller in the industry/ market.

 In the long run, the monopolist maximizes profit at an output level

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