Understanding how businesses earn revenue and operate in different market environments is essential for making smart economic decisions. Unit 4 of Microeconomics explains various types of revenue and introduces you to key market structures such as perfect competition, monopoly, monopolistic competition, and oligopoly.
This unit equips BBA students with practical insights into how firms set prices and compete in real markets.
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Download Unit 4 – Revenue and Market Structures Notes PDF
What is Revenue in Economics?
Revenue refers to the income a firm generates from the sale of goods or services. It is a fundamental concept for evaluating business performance and pricing strategy.
Types of Revenue:
Total Revenue (TR): The total income from sales (TR = Price × Quantity)
Average Revenue (AR): Revenue per unit sold (AR = TR ÷ Quantity)
Marginal Revenue (MR): The additional revenue earned from selling one extra unit of output
Relationship Between Revenue and Elasticity
Elasticity of demand affects how total revenue changes in response to price:
When demand is elastic, a price drop increases total revenue.
When demand is inelastic, a price drop reduces total revenue.
This relationship helps businesses make data-driven pricing decisions.
Market Structures Overview
Market structure describes the nature of competition and pricing in different types of markets. It determines how much control firms have over prices and output.
(a) Perfect Competition
Key Features:
Large number of buyers and sellers
Homogeneous products
Free market entry and exit
Perfect information
Firms are price takers
Equilibrium of Firm and Industry:
In the short run, firms may earn profit or loss, but in the long run, they earn normal profits as entry and exit balance out.
Equilibrium occurs where Marginal Cost (MC) = Marginal Revenue (MR) = Price.
(b) Monopoly
Key Features:
Single seller controls the entire market
No close substitutes
High barriers to entry
Full control over price (price maker)
Price and Output Determination:
A monopolist sets output where MR = MC, and uses the demand curve to find the price.
This often leads to higher prices and lower output compared to perfect competition.
Price Discrimination:
The practice of charging different prices to different customers for the same product, based on factors like income level or elasticity of demand. Common examples include train tickets, movie theaters, and airline pricing.
(c) Monopolistic Competition
Key Features:
Many sellers with slightly differentiated products
Freedom of entry and exit
Some control over pricing
Product branding and advertising play a role
Price and Output Determination:
Firms set prices where MR = MC. In the short run, they may earn profits, but in the long run, only normal profits are sustained as new competitors enter the market.
(d) Oligopoly
Key Features:
A few dominant firms control the market
High interdependence in pricing
Barriers to entry are high
Products may be identical or differentiated
Kinked Demand Curve Model:
Explains price rigidity in oligopoly.
If one firm lowers its price, others match it, causing a steep fall in revenue.
If one raises the price, others don’t follow, leading to loss of customers.
This creates a kinked demand curve with a discontinuous marginal revenue curve.