Market and Revenue Curves
A market is the mechanism through which buyers and sellers exchange goods and services. Markets are classified by competition into perfect competition and imperfect competition (monopoly, monopolistic competition, oligopoly). Revenue is the money a firm receives from sale: Total Revenue (TR = P×Q), Average Revenue (AR = TR/Q), and Marginal Revenue (MR = ΔTR/ΔQ). Under perfect competition AR = MR = P (horizontal line); under monopoly AR slopes downward and MR lies below AR with the same intercept and twice the slope.
In this chapter
Meaning and Features of a Market
- a commodity (good or service being traded),
- buyers and sellers,
- communication / contact (physical or digital), and
- a price agreed through interaction of demand and supply
Classification of Markets by Competition
Markets are broadly divided into perfect competition (many sellers, identical product, free entry) and imperfect competition. Imperfect competition has three forms: monopoly (one seller, e.g. Nepal Electricity Authority for electricity distribution), monopolistic competition (many sellers, differentiated product, e.g. restaurants in Thamel), and oligopoly (a few large sellers, e.g. Nepal Telecom and Ncell in mobile telecom — sometimes called a duopoly).
Comparison of market structures
| Feature | Perfect Competition | Monopoly | Monopolistic Comp. | Oligopoly |
|---|---|---|---|---|
| Number of sellers | Very many | One | Many | A few (2–10) |
| Type of product | Homogeneous | Unique, no substitutes | Differentiated | Homogeneous or differentiated |
| Entry / exit | Free | Blocked (barriers) | Relatively free | Restricted |
| Price control | None (price taker) | Full (price maker) | Some | Considerable (mutual dependence) |
| Example (Nepal) | Kalimati vegetables | NEA electricity | Thamel restaurants | NTC + Ncell telecom |
| AR curve shape | Horizontal (P = AR = MR) | Downward sloping | Downward, elastic | Downward, kinked possible |
Features of Perfect Competition
Six Key Features of Perfect Competition
- Many buyers and sellers — no single buyer or seller can influence price.
- Homogeneous product — every unit is identical (e.g. paddy in Bhaktapur wholesale market).
- Free entry and exit — any firm can start or stop business freely.
- Perfect knowledge — buyers and sellers know all prices and qualities.
- Perfect mobility of factors — labour and capital move freely between uses.
- No transport cost / no selling cost — same price everywhere.
Features of Monopoly
Six Key Features of Monopoly
- Single seller — only one firm supplies the entire market.
- No close substitutes — buyers have no alternative (e.g. NEA electricity has no real substitute for most homes).
- Barriers to entry — legal (patent, licence), natural (huge capital), or technological prevent competitors.
- Price maker — the monopolist decides the price (subject to the demand curve).
- Price discrimination possible — different prices to different buyers (e.g. NEA charges industry more than households).
- Downward-sloping AR curve — to sell more, monopolist must lower price.
Revenue Concepts: TR, AR, MR
Revenue is the money a firm receives from selling its output. Total Revenue (TR) is price × quantity sold. Average Revenue (AR) is revenue per unit (= TR/Q); since TR = P×Q, AR = P — so the AR curve is the same as the demand curve facing the firm. Marginal Revenue (MR) is the additional revenue from selling one more unit. These three concepts are key to understanding firm equilibrium in the next chapters.
Total, average, and marginal revenue
AR and MR for a linear (downward-sloping) demand curve
Revenue under perfect competition (horizontal demand)
Key Relationship: MR lies below AR
Under monopoly (and any downward-sloping demand), to sell one more unit the firm must lower the price of all units — so the additional revenue (MR) is less than the price (AR). For a linear demand P = a − bQ: AR has intercept a and slope −b; MR has the same intercept a and twice the slope −2b. So MR is steeper than AR and lies below it. Under perfect competition, the firm can sell any quantity at the same price, so AR = MR = P (a horizontal line).
Revenue behaviour: Perfect Competition vs Monopoly
| Aspect | Perfect Competition | Monopoly |
|---|---|---|
| Price (P) | Given by market; firm is price taker | Firm sets price; price maker |
| AR curve | Horizontal at P = AR = MR | Downward sloping (the demand curve) |
| MR curve | Same horizontal line as AR | Below AR; same intercept, twice slope |
| TR curve | Straight upward-sloping line from origin (TR = P·Q) | Inverted-U: rises then falls; max when MR = 0 |
| AR vs MR | AR = MR = P | AR > MR (for Q > 0) |
| Example (Nepal) | Vegetable vendors in Kalimati | Nepal Electricity Authority |
Practice Problem
A vegetable vendor in Kalimati sells tomatoes at Rs 40 per kg — the prevailing market price. She can sell any quantity at this price. (a) Write the AR and MR functions. (b) Compute TR, AR, MR for Q = 0, 10, 20, 30, 40 kg. (c) Plot the AR/MR and TR curves.
Practice Problem
The Nepal Electricity Authority (NEA) faces a linear demand for electricity: P = 12 − 0.5Q (P in Rs per unit, Q in crore units). (a) Write AR and MR. (b) Compute TR, AR, MR for Q = 0, 4, 8, 12, 16, 24. (c) At what Q is TR maximum? What is the maximum TR?
Practice Problem
A monopolist faces demand P = 100 − 4Q. (a) Find AR and MR. (b) At what price and quantity does the monopolist maximise total revenue? (c) Compute the maximum TR and verify that MR = 0 there.
Quick Revision
- Market = arrangement for buyers & sellers to exchange; needs commodity, parties, contact, price.
- Four market structures: perfect competition, monopoly, monopolistic competition, oligopoly.
- TR = P × Q; AR = TR/Q = P; MR = ΔTR/ΔQ.
- Linear demand P = a − bQ → MR = a − 2bQ (same intercept, twice slope).
- Perfect competition: AR = MR = P (horizontal); TR = straight line through origin.
- Monopoly: AR downward, MR below AR; TR inverted-U, max when MR = 0.
- NEA = monopoly example; Kalimati vegetables = perfect competition; NTC/Ncell = oligopoly.