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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Marginal Cost, Total Cost and Average Cost

Marginal Cost (MC)

Definition: According to Ferguson, Marginal Cost is the addition to the total cost due to addition of one unit of output. In other words, Marginal Cost is the change in total cost when an additional unit of output is produced.

MCn= TCn ─ TCn-1                 OR                  MC = Change in total cost/ Quantity  

Total Cost

Total cost is the sum total of fixed cost and variable cost. With increase in output, total cost also increases.

Average Cost

Average Cost is the cost per unit of output.     

AC = TC/Q

Also, Average cost is the sum total of average fixed cost and average variable cost. i.e.       

Average Cost (AC) = Average Fixed Cost (AFC) + Average Variable Cost (AVC)      

AFC curve is rectangular hyperbola. It means that AFC × Q (which is equal to TFC) is constant at all level of output. 

Average Variable Cost: (AVC)

Average variable cost is the variable cost per unit of output.   AVC= TVC/Q


Graph showing TC,  AC, AVC, AFC, MC


Q1. As output increases, AC tends to be closer to AVC. Why?

Answer: We know that, AC= AFC + AVC. As output increases, AFC continuously falls, because TFC is constant. Consequently, the component of AFC in AC tends to shrink. This brings AC closer to AVC.

Q2.  Can AC and AVC ever be equal for any level of Output?

Answer: No, this is because AC is vertical summation of AVC and AFC. Being a vertical summation, AC must be vertically above AFC as well as AVC.


A. Relationship between Average Cost and Marginal Cost

(1) When AC falls, MC is lower than AC

(2) when AC rises, MC is greater than AC

(3) When AC does not change, MC is equal to AC. When falling AC reaches its lowest point, it sticks to its minimum level. At this point, MC curve intersect AC when AC is minimum.

Q. 1. AC may continue to decline even when MC is rising. Why?

Answer: Even when MC is rising, AC may continue to fall as long as MC <AC.

Q2. Is it true to say that AC falls when MC falls?

Answer: No, AC may continue to fall even when MC is rising provided MC<AC.


B. Relationship between AVC and MC

(1) When AVC falls, MC is lower than AC

(2) when AVC rises, MC is greater than AC

(3) When AVC does not change, MC is equal to AVC. (It is the lowest point of AVC). 


C. Relationship between Total Cost and Marginal Cost

(1) When MC is decreasing, TC is increasing at a diminishing rate.

(2) When MC is rising, TC increases at an increasing rate.

(3) when MC reaches its lowest point, TC stops increasing at decreasing rate 


Observations:

1. MC curve should cut both AC and AVC at their lowest points.

2. When AC declines, MC declines faster than AC. Hence, MC curve remain below AC curve.

3. When AC increases, MC increases faster than AC. Hence, MC curve remains above AC curve.








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