revenue we have looked at production and then cost so we have anaylsed our technical capabilities...
TRANSCRIPT
RevenueRevenue
• We have looked at Production and then We have looked at Production and then Cost so we have anaylsed our technical Cost so we have anaylsed our technical capabilities and the costs of producing capabilities and the costs of producing output, output,
• on average on average
• and at the margin (one more unit)and at the margin (one more unit)
• Now we have to examine what we get for an Now we have to examine what we get for an additional unitadditional unit
REVENUEREVENUE
• Thus we need to defining total, average and marginal revenue
• We start by examining revenue curves when firms are price takers
• By this we mean that firms are small relative to the total market and that they do not have much influence over the price charged.
• In such a market if they raise price, people will go elsewhere…
• … and if they reduce price (even if it were profitable) they would not be able to cope with the resultant demand.
• Thus we need to defining total, average and marginal revenue
• We start by examining revenue curves when firms are price takers
• By this we mean that firms are small relative to the total market and that they do not have much influence over the price charged.
• In such a market if they raise price, people will go elsewhere…
• … and if they reduce price (even if it were profitable) they would not be able to cope with the resultant demand.
RevenueRevenue
• That is, they perceive the price they can That is, they perceive the price they can receive as constant.receive as constant.
• So as far as they are concerned the So as far as they are concerned the demand curve is demand curve is .
• That means they believe:
• They can sell as much as they want at the going price.
– average revenue (AR)
– marginal revenue (MR)
Deriving a firm’s Deriving a firm’s ARAR and and MRMR: price-taking firm: price-taking firm
O O
Pri
ce (
£)
AR
, MR
(£
)
Q (millions) Q (hundreds)
Pe
S
D
(a) The market (b) The firm
0
1000
2000
3000
4000
5000
6000
0 200 400 600 800 1000 1200
TR
(£
)
Quantity
Quantity(units)
0200400600800
10001200
Price
5555555
TR(£)
0100020003000400050006000
Total revenue for a price-taking firmTotal revenue for a price-taking firm
TR
When is a firm a price taker?When is a firm a price taker?
• PERFECT COMPETITIONPERFECT COMPETITION
• Assumptions– firms are price takers
– freedom of entry
– identical products
– perfect knowledge
• PERFECT COMPETITIONPERFECT COMPETITION
• Assumptions– firms are price takers
– freedom of entry
– identical products
– perfect knowledge
Short-run equilibrium of industry and firm under Short-run equilibrium of industry and firm under perfect competitionperfect competition
O O
S
D
(a) (a) Industry Industry
P £
Q (millions)
Pe
(b) (b) Firm Firm
ARD = AR= MR
MC
Qe
AC
AC
Q (thousands)
Supernormal ProfitsSupernormal Profits
• What was included in total costs when we What was included in total costs when we drew the TC and AC curves?drew the TC and AC curves?
• We included the cost of capital, labour, and We included the cost of capital, labour, and raw, materials and …………….raw, materials and …………….
• An appropriate return for the entrepreneur An appropriate return for the entrepreneur for his or her labour, capital invested and for his or her labour, capital invested and riskrisk
• So what does the yellow area represent?So what does the yellow area represent?
• (AR – AC)*Q =(AR – AC)*Q =
• Supernormal profitSupernormal profit
Short-run equilibrium of industry and firm under Short-run equilibrium of industry and firm under perfect competitionperfect competition
O O
S
D
(a) (a) Industry Industry
P £
Q (millions)
Pe
(b) (b) Firm Firm
ARD = AR= MR
MC
Qe
AC
AC
Q (thousands)
Supernormal Profit
PERFECT COMPETITIONPERFECT COMPETITION
– Produce where MR = MC
– Under perfect Competition P = MR
– So MR= P = MC
– possible supernormal profits = (AR-AC)*Q
– What is this firm’s supply curve in the Short-Run?
– Produce where MR = MC
– Under perfect Competition P = MR
– So MR= P = MC
– possible supernormal profits = (AR-AC)*Q
– What is this firm’s supply curve in the Short-Run?
O O
(a) (a) Industry Industry
P £
P1
Q (millions)
S
D1
(b) (b) Firm Firm
D1 = MR1
S
a
P2
D2 = MR2
D2
b
P3
D3 = MR3
D3
c
Q (thousands)
Deriving the short-run supply curveDeriving the short-run supply curve
.. And a new LONG RUN equilibrium is established at .. And a new LONG RUN equilibrium is established at PPee,Q,Qee
O O
S
D
(a) (a) Industry Industry
P
£
Q (millions)
P
(b) (b) Firm Firm
ARD = AR= MR
MC
Qe
AC
AC
Q (thousands)
S1
Pe
PERFECT COMPETITIONPERFECT COMPETITION
• Short-run supply curve of industry
• Long-run equilibrium of the firm
– all supernormal profits competed away
– Since AR=AC and
– (AR-AC)*Q=0
• Short-run supply curve of industry
• Long-run equilibrium of the firm
– all supernormal profits competed away
– Since AR=AC and
– (AR-AC)*Q=0
So the LONG RUN Equilibrium under Perfect So the LONG RUN Equilibrium under Perfect Competition requires that AR=P=MR=MC=ACCompetition requires that AR=P=MR=MC=AC
O O
D
(a) (a) Industry Industry
P
£
Q (millions)
(b) (b) Firm Firm
D = AR= MR
MC
Qe
AC
Q (thousands)
S1
Pe Pe
..and quantity and price rise. ..and quantity and price rise.
O O
D
(a) (a) Industry Industry
P
£
Q (millions)
P
(b) (b) Firm Firm
D = AR= MR
MC
Qe
AC
Q (thousands)
S1
Pe Pe
D1
In particular, each existing firm supplies more, In particular, each existing firm supplies more, up along its SR Supply curve, the MC curve.up along its SR Supply curve, the MC curve.
O O
D
(a) (a) Industry Industry
P
£
Q (millions)
(b) (b) Firm Firm
D = AR= MR
MC
Qe
AC
Q (thousands)
S
Pe Pe
D1
When will firms stop entering?When will firms stop entering?When all supernormal profits have gone.When all supernormal profits have gone.
That is, when the price returns to PThat is, when the price returns to Pee
..and firm output is back at Q..and firm output is back at Qee
S1