Econometrics And Econometricians December 01, 2021

Revenue curves under Different markets

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Broadly markets are of three types as follows: 1. Perfectly competitive market 2.Monopoly market 3.Monopolistic competitive market 1.Revenue curve under perfectly competitive market or Perfect competition: Under perfect competition, a firm is a price taker. It cannot influence /change the market price. AR and MR curve 2. Revenue Curve Under Monopoly: A monopolist is a price maker. He is the single seller of the product in the market. Under monopoly, however, if a firm desires to sell more , he has to reduce price of the product. Thus, there is  negative relationship  between price of the product na ddemand for the product in a monopoly market. Accordingly, a Firm’s AR curve (or the demand curve or the priice line) slopes downaward.  3. Revenue Curve Under Monopolistic Competition: In a Monopolistic Competitive market, producers sell “differentiated product” which means products whose close substitutes are easily available in the market. Under Monopolistic Compet...
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Consumer’s Equilibrium

 Consumer’s equilibrium refers to optimum choice of the consumer. It is reached when he maximizes his satisfaction. According to Indifference Curve analysis, the consumer reaches his equilibrium (optimum choice or commodity bundle) when the following two conditions are satisfied:

(1) MRSXY (Slope of the IC) = (Slope of the budget line/ Price Line)

(2) IC is convex at the point of equilibrium Or MRS falls continuously as more is consumed of one good in place of another.  


Rationale Behind Conditions of Equilibrium

Condition1:MRSXY = Px/Py 

[Slope of IC = Slope of Price line  OR  IC and price line are tangent to each other]

The consumer will strike his equilibrium only when MRSXY = Px/Py. Because at no other point (within the range of available/feasible combinations of Good-X and Good -Y) can he maximize satisfaction.


E is the point of consumer equilibrium


Condition 2: IC is convex at the point of equilibrium Or MRS falls continuously as more is consumed of one good in place of another. 

At the point of equilibrium, IC must be convex to the origin. Convexity of IC is in accordance with the Law of diminishing marginal utility. However, when the IC is concave and the Law of diminishing marginal utility is not in operation, the consumer will continue to consume more and more of one commodity, getting higher marginal utility from its every successive unit. The consumer will not be able to strike any stable equilibrium in such a situation.

Hence, the conclusion is that only convexity of IC allows a stable equilibrium NOT the Concavity. 

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