Unit 3: Revenue curves & market structures

• Total revenue (TR) = P × Q
• Average revenue (AR) = TR / Q = price
• Marginal revenue (MR) = change in TR from selling one more unit

In perfect competition, AR = MR = price (horizontal). In imperfect competition, AR and MR slope downward and MR lies below AR. Relationship with elasticity: MR = AR (1 − 1/e). When e > 1, MR is positive and TR rises as price falls; when e = 1, MR = 0 and TR is maximum; when e < 1, MR is negative.

Features: very many buyers and sellers, a homogeneous product, free entry and exit, perfect knowledge and perfect mobility. Each firm is a price taker.

• Equilibrium: MR = MC and MC rising.
• Short run: a firm can earn super-normal profit, normal profit or a loss (it continues while price ≥ AVC).
• Long run: free entry removes super-normal profit; firms earn normal profit at P = MC = minimum AC.

A monopoly has a single seller, no close substitutes and strong barriers to entry. The monopolist is a price maker.

• Equilibrium: MR = MC; price is read from the AR curve, so P > MC.
• A monopolist can earn super-normal profit even in the long run and may practise price discrimination (charging different prices to different buyers, e.g. railway fares).

• Monopolistic competition (Chamberlin): firms sell close but differentiated products (soaps, restaurants). In the long run, firms earn normal profit with excess capacity.
• Oligopoly: a few large firms whose decisions affect each other (telecom, cement, cars).
• Non-collusive: firms act independently — the kinked demand curve (Sweezy) explains price rigidity: rivals match price cuts but not price rises.
• Collusive: firms cooperate — cartels (formal agreements, like OPEC) or price leadership, where one firm (dominant or low-cost) sets the price and others follow.