Market Equilibrium: Fixed Number Of Firms Video Lecture | SSC CGL Tier 2 - Study Material, Online Tests, Previous Year

competition is a form of a market
structure there are four main ones that
we talk about the first one is monopoly
monopoly is when there's only one form
in the market and then if you look at
the number of forms that exist in the
market that would have to differentiate
between the different market structures
so origami has a few firms monopolistic
competition has many firms and perfect
competition has large number of firms
that exist in this market now the other
features are north market power and that
really means that it doesn't matter if
you exist or not in the market there are
identical products you can't feel
different shear between the products of
different forms they're all substitutes
and there's no restriction to enter the
market
what is revenue pricing to quantity the
market price is given as $25 how much
revenue how much do I make if I sell one
unit of this good then the total revenue
is 25 times of 1 which gives 25 if you
make two goods and each one sells for 25
the total revenue that you make is 25
into 2 which is 50 now if you keep doing
that our total revenue comes to be 25
into 375 25 into 400 and so on so this
is how you call for the total revenue
for this form or for now we have the
total revenue and we just need to plot
this and this is what it or a revenue
function looks like
given that the price was 25 what do you
mean by marginal revenue so you produce
the first coffee unit of coffee you
produce the first cup of coffee and you
sold it then you produce the second cup
of coffee yeah now you want to know what
is the revenue that you made from this
second a cup of coffee
the total revenue when you sold two cups
was $50 right so how much did you make
only from the second good well it was
how much you made from 1 and what is the
extra that you made when you saw the
second cup how much is that 25 the
increase neutral revenue when you
produce the second cup is 25 so that's
your marshal revenue now what is it for
revenue from 3
subs of coffee 75 but marshal revenues
how much did you make from this third
cup of coffee and how much did you make
well it was you were making $50 from two
cups the third cup gave you this extra
amount and where this is extra mod 75
minus 50 gets 25 this is how you'll
calculate the marginal revenues your
calculated for the fourth cup fifth cup
and sixth cup and so on so really what
the marginal revenue and sub being is 25
right so if you draw this marshal
revenue graph it's a straight line and
it's equal to the price is equal to the
price that was determined by the market
and this is really what you mean by the
form being a price taker and so you have
a cafe and it's called an ephah cafe
what do you need to set up this cafe you
would need first of all a place so let's
say we rent this place and we are paying
a weekly rent we need some furniture and
we need a coffee machine let's say you
purchase this and we're paying weekly
installments on this furniture and a
coffee machine as well so this is the
one-time setup cost right so you set
this up and you're paying these costs
now say we had the rent was 100
furnitures 50 and the cost of the
machine is 50 so what is a total fixed
cost that you're paying is $200
now fixed in the sense that it's the
one-time setup costs as you're paying
now what is the variable cost while
you're making coffee and you want to
know you want to decide whether you want
to open this restaurant cafes if you
open the cafe
you need to have lights running you need
to have maybe the air conditioning
running or the heating running you need
to you're spending some electricity when
you open this cafe the second thing you
need is ingredients to make this coffee
I am still thinking about coffee beans
milk sugars everything that goes into
making that one cup of coffee the cost
of those ingredients and then you need
to use these ingredients in the machine
to produce coffee at
machine is also using electricity so you
really have variable cost has cost of
electricity plus all the ingredients
that you use
it's called variable cost the reason why
it's referred to as a variable cost is
completely because of the definition of
variable what does it mean variable it
changes so if you produce one cup of
coffee you are incurring this variable
cost if you put produce two cups of
coffee does this cost increase yeah it
does because he's spending extra on the
ingredients as well as left Steve on the
machine and keeping the cafe open this
is variable too cuz it varies according
to how much you produce what would be
your variable cost
if you produced no coffee at all and you
did not open your cafe this zero because
you're not using electricity you're not
making coffee you're not spending money
on ingredients and hence variable cost
so now we're going to think about cost
functions let's just say when you
produce one cup of coffee we hire one
person labor and let's the wages for
that one guy is $8 and you're paying him
$8 right the cost of electricity is $7
the cost of ingredients to make that one
cup of coffee is $5 so every here we
have all the variable costs Pilar
spelled out right labor electricity and
ingredients
to make two cups of coffee yester just
hiring one guy and this is the cost of
flavors so wage is $8 is 8 into 1 that's
how much you're paying for labor
electricity and ingredients and so on so
let's just have a cost function for 9
cups of coffee and that's how it
increases as you can see after I make
the six cup of coffee I hire rehire well
our Fe Cafe hires another unit of
Labor's it hires two people to work at
the shop took work at the cafe and if
each guys paid 8 bucks you're paying
them $16
the cost of electricity is increasing
the cost of labour is increasing of
course the cost of ingredients is
increasing you need more milk and coffee
beans to produce nine cups this is your
cause cost and so you can calculate the
total variable cost and all you're doing
is you're just adding up the cost sub
five plus seven plus eight gets 21 8
plus 8 plus 14 gives you 30 so if you
just added this up and this is our total
variable cost let's just think about
what the fixed cost is right there's a
cost with the Machine 50 does it matter
if you produce one cup of coffee or nine
cups of coffee no you still need it
cause a coffee machine so the cost of
the Machine hasn't changed the rent of
all you're paying the rent
whether you produce one coffee or
whether you make nine coffees or put
furniture same thing and hence the term
fixed cost if these are fixed they don't
change as you produce more or less
coffee so you have fixed cost and total
fixed cost would be adding up all the
fixed cost and in this case is 50 150
plus fifty gives you two hundred as your
fixed cost and this fixed cost is the
same irrespective of how much you
produce so what is your total cost total
variable cost plus total fixed cost
gives you total cost that's your cost
function now I want you to talk about
what we had before we had the marshal
revenue right and now we also have
marginal cost function now let me ask
you if given this given that when you
produce one to nine goods this is what
the marginal revenue is again what is
the marginal revenue let's look at a
quantity six when you produce the sixth
cup of coffee the sixth cup of coffee
gives you an extra revenue of twenty
five that's what your marshal revenue is
but when you produce sixth cup of coffee
what is the extra cost that's your
marginal cost and marginal cost in this
case
is 18 how did you golf with the marginal
cost
well 275 - 275
- 257 is a marginal cost so would you
produce this 6th cup of coffee
well the increase in cost the marginal
cost is 18 but the revenue you make is
25 you make more money from the 6th cup
of coffee then it costs you to produce
the good so what you produce 6 cup of
coffee oh yeah
making more money than you are spending
on it would you make would you produce
the 7th go to small the 7th cup of
coffee
yeah the increase in cost is 22
the revenue is 25 would you produce the
eighth cup of coffee are you when you
produce the eighth cup of coffee it
gives you a revenue of 25 but the cost
incurred is 28 so would you make the 28
so I would you make the 8 cup of coffee
nope
so how did you decide how many cups of
coffees to produce well where your
marshal revenue was equal to marginal
cost so if I was to draw this marshal a
cost function that we just had and the
marshal revenue we already know is 25 I
just I just drew this marginal cost
function given the numbers we had
earlier how much would the firm produce
well we don't have a whole number here
but it's a 7.5 again what was fixed cost
and variable cost how much would you
incur in cost if you decided not to open
your cafe this week there's no variable
cost because you're not producing any
coffee you're not making any coffee and
are opening up the shop we used to paint
the fixed cost you're still paying the
rent the weekly rent you're still paying
the cost of furniture and cost of the
machine what we mean by short-run in the
long run let's just think about this
short and long of it how long
take you to exit this business you would
need to stop sell the furniture sell the
Machine and get out of this rental
contract well probably a year because
that's how long the contract was so for
a year you had to pay this fixed cost so
if it's one year in this case then what
year is referred to as the long-run and
anything that's less than a year would
be referred to as the short-run so if
you're talking about a week that's a
short run if you're referring to a month
that's a short run if you were referring
to six months that's a short run so the
long run is defined as the nothing is a
nothing is fixed you can get rid of your
business
so suppose you had this cafe and we are
thinking about the short run and in this
example the short run is one week so you
have to decide whether to keep your cafe
open or closed for this one week how
much cost you incur well variable cost
cost of opening the cafe and all the
fixed cost which is $200 but if you
close the cafe well that's what we refer
to as shutting down in the short run so
if you shut down in the short run what
is your variable cost and seal now
suppose I told you that if you get the
rest kept the cafe open for for a week
the total revenue that you would make
was 150 for this week and the variable
cost that you would incur that means
given how much coffee you'll end up
selling the variable cost was 120 this
week would you open or shut down your
cafe this week now if you're going to
ask well if I kept it for one what a
store cost 200 which I have to bake plus
120 so total cost is 320 and versatile
revenue Wow okay and I'm giving a number
to you which is 150 so what is your loss
170 what if you shut down in the short
run
the pro cost is fixed cost turbo revenue
never make any revenue you're not open
so what's he lost 200 200 if you shut
down in the short run your loss is 200
if you're open in the short run despite
the fact that your total revenue is only
150 and your total cost is 320 I'm
making a loss but you're making a loss
of 170 your loss is smaller if you open
your cafe then if you get rid closed
what does that mean that means that is
profitable for you to have your cafe
open as long as your total revenue is
higher than your total variable cost not
your total cost put your total variable
cost and why is that
because if you're making 150 in your
revenue you're recovering or if your
variable cost which is 120 plus an extra
$30 we should pay for your fixed cost