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Microeconomics: Market Structures and Revenue Functions

1. Revenue Function
●​ Revenues are receipts obtained from selling products.
●​ Three main categories of revenue:
○​ Total Revenue (TR)
○​ Average Revenue (AR)
○​ Marginal Revenue (MR)
●​ Total Revenue (TR):
○​ The total amount of money a company receives from the sale of a given quantity of
its product.
○​ Obtained by multiplying the unit price of the commodity and the quantity of that
product sold.
○​ Formula: TR = P \times Q
■​ Where P = Price of the product
■​ Q = Quantity of the product sold.
○​ From demand function P = a - bQ, substituting for P:
■​ TR = (a - bQ)Q
■​ TR = aQ - bQ^2
●​ Average Revenue (AR):
○​ The revenue per unit of item sold.
○​ Calculated by dividing the total revenue by the amount of the product sold.
○​ Formula: AR = TR/Q = (PQ)/Q = P
○​ Therefore, AR = P.
○​ Average revenue and the price of the product (P) are the same.
○​ Average revenue per unit received by the seller from the sale of the commodity.
●​ Marginal Revenue (MR):
○​ The change in total revenue resulting from one unit increase in sales.
○​ The additional amount of money on revenue the monopolist firm receives by selling
one more unit of the product.
○​ Calculated as the ratio of the change in total revenue to the change in the sale of
the product.
○​ Formula: MR = \Delta TR / \Delta Q = \Delta(P \times Q) / \Delta Q
○​ Can also be estimated as the change in total revenue.
2. Monopoly Conditions and Revenue Curves (Table and Graph)
●​ Table 4.1: TR, AR, and MR under Monopoly Conditions
Quantity (Q) Price (P) (in Birr) Total Revenue Average Revenue Marginal Revenue
(TR) (P x Q) (AR) (TR/Q) (MR) (ΔTR/ΔQ)
0 11 0 - -
1 10 10 10 10
2 9 18 9 8
3 8 24 8 6
4 7 28 7 4
5 6 30 6 2
6 5 30 5 0
7 4 28 4 -2
8 3 24 3 -4
 ●​ Observations from the Table/Graph (Figure 4.5):
○​ The total revenue curve of the monopolist firm has an inverse U-shape.
○​ The total revenue of a monopolist firm:
■​ First increases with the quantity of sales.
■​ Reaches its maximum.
■​ Finally decreases when the quantity of sales increases.
○​ A monopolist firm's AR and MR curves are both downward sloping.
○​ Or (decreases with sales quantity).
3. Monopolistically Competitive Market
●​ Characteristics:
○​ Consists of some features of Perfect Competition and some features of Monopoly.
○​ Main Characteristic: Product differentiated (heterogeneous).
○​ Each firm produces and supplies a product at least slightly different (e.g., brand
name, quality, etc.).
○​ Many sellers and buyers (but relatively less than in perfectly competitive market).
○​ Free entry and exit of firms (not worth stating in the business, it is free to exit).
○​ Existence of non-price competition.
■​ It is an essential part of a monopolistic competition.
■​ Non-price competition factors have the firm of product:
■​ Quantity
■​ Advertising
■​ Brand name
■​ Customer service, etc.
●​ Firms are Price Makers.
●​ 4.3.2 The Demand and Revenue Functions (Monopolistically Competitive Firm):
○​ A. Demand:
■​ The demand curve is downward sloping.
■​ Unlike Perfect Competitive firms, a firm in a monopolistically competitive
market has few rivals.
■​ A monopoly firm has no rivals, thus the demand curve of a firm under
monopolistic competition is flatter than that of a monopoly. (Figure 4.6)
○​ B. Revenue Function:
■​ In the case of monopolistic competition, the firm expects an increase in
demand if it lowers the price.
■​ The demand curve of a firm is also the AR curve.
■​ This firm has a downward sloping demand curve.
■​ The MR is less than the AR and also downward sloping.
4. Oligopoly Market
●​ Definition: A market organization in which there are few firms that produce.
○​ Identical products.
○​ Or differentiated products.
●​ Main Characteristics:
○​ More than one (but few sellers).
○​ Many buyers and few firms.
○​ Homogeneous or differentiated products.
○​ Firms are mutually interdependent (they behave as if one firm's actions are directly
affected by those rivals and by actions of others).
○​ Example: The world market for:
 ■​ Crude oil
■​ Cement and sugar factories.
○​ Barrier to entry and exit of firms.
○​ Patents or access to technology.
○​ On raw materials may exclude potential competitions.
○​ There is interdependence among the firms.
■​ The decision of one firm affects all firms and so all firms follow the other firms.
●​ Duopoly:
○​ The simplest type of Oligopoly.
○​ A Duopoly is a special case of Oligopoly in which there are only two firms in the
industry.
○​ Example: Ethio-Telecom and Safaricom.
●​ 4.4.2 The Demand and Revenue Function (Oligopoly Firm):
○​ A. Demand:
■​ In an Oligopoly market, firms are price makers.
■​ Each firm faces a downward sloping demand curve.
■​ Any change in price by one firm may result in price changes by rival firms.
■​ As a result, the demand curve faced by an Oligopoly firm keeps on shifting.
Summary of Revenue Curves Across Market Structures (Figure 4.6)
●​ Perfectly Competitive Market: Demand curve for a firm is horizontal (steeper, less price
elastic).
●​ Monopoly Firm/Industry: Demand curve for a monopoly firm is downward sloping.
●​ Monopolistically Competitive Firm: Demand curve for a monopolistically competitive
firm is flatter than that of a monopoly.