NCERT Textbook - Non competitive Markets Commerce Notes | EduRev

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Commerce : NCERT Textbook - Non competitive Markets Commerce Notes | EduRev

 Page 1


Chapter 6
Non-competitive Mark Non-competitive Mark Non-competitive Mark Non-competitive Mark Non-competitive Markets ets ets ets ets
We recall that perfect competition was theorised as a market
structure where both consumers and firms were price takers.
The behaviour of the firm in such circumstances was described
in the Chapter 4. We discussed that the perfect competition
market structure is approximated by a market satisfying the
following conditions:
(i) there exist a very large number of firms and consumers of the
commodity, such that the output sold by each firm is negligibly
small compared to the total output of all the firms combined,
and similarly, the amount purchased by each consumer is
extremely small in comparison to the quantity purchased by
all consumers together;
(ii) firms are free to start producing the commodity or to stop
production;
(iii) the output produced by each firm in the industry is
indistinguishable from the others and the output of any other
industry cannot substitute this output; and
(iv) consumers and firms have perfect knowledge of the output,
inputs and their prices.
In this chapter, we shall discuss situations where one or more
of these conditions are not satisfied. If assumptions (i) and (ii) are
dropped, we get market structures called monopoly and oligopoly.
If assumption (iii) is dropped, we obtain a market structure called
monopolistic competition. Dropping of assumption (iv) is dealt with
as ‘economics of risk’. This chapter will examine the market
structures of monopoly, monopolistic competition and oligopoly.
6.1 SIMPLE MONOPOLY IN THE COMMODITY MARKET
A market structure in which there is a single seller
is called monopoly. The conditions hidden in
this single line definition, however, need to be
explicitly stated. A monopoly market
structure requires that there is a
single producer of a particular
commodity; no other commodity
works as a substitute for
this commodity; and for this
situation to persist over
time, sufficient restrictions ‘I’ ‘M’ Perfect Competition
© NCERT
not to be republished
Page 2


Chapter 6
Non-competitive Mark Non-competitive Mark Non-competitive Mark Non-competitive Mark Non-competitive Markets ets ets ets ets
We recall that perfect competition was theorised as a market
structure where both consumers and firms were price takers.
The behaviour of the firm in such circumstances was described
in the Chapter 4. We discussed that the perfect competition
market structure is approximated by a market satisfying the
following conditions:
(i) there exist a very large number of firms and consumers of the
commodity, such that the output sold by each firm is negligibly
small compared to the total output of all the firms combined,
and similarly, the amount purchased by each consumer is
extremely small in comparison to the quantity purchased by
all consumers together;
(ii) firms are free to start producing the commodity or to stop
production;
(iii) the output produced by each firm in the industry is
indistinguishable from the others and the output of any other
industry cannot substitute this output; and
(iv) consumers and firms have perfect knowledge of the output,
inputs and their prices.
In this chapter, we shall discuss situations where one or more
of these conditions are not satisfied. If assumptions (i) and (ii) are
dropped, we get market structures called monopoly and oligopoly.
If assumption (iii) is dropped, we obtain a market structure called
monopolistic competition. Dropping of assumption (iv) is dealt with
as ‘economics of risk’. This chapter will examine the market
structures of monopoly, monopolistic competition and oligopoly.
6.1 SIMPLE MONOPOLY IN THE COMMODITY MARKET
A market structure in which there is a single seller
is called monopoly. The conditions hidden in
this single line definition, however, need to be
explicitly stated. A monopoly market
structure requires that there is a
single producer of a particular
commodity; no other commodity
works as a substitute for
this commodity; and for this
situation to persist over
time, sufficient restrictions ‘I’ ‘M’ Perfect Competition
© NCERT
not to be republished
In order to examine the difference in the equilibrium resulting from a monopoly
in the commodity market as compared to other market structures, we also need
to assume that all other markets remain perfectly competitive. In particular, we
need (i) that the market of the particular commodity is perfectly competitive
from the demand side ie all the consumers are price takers; and (ii) that the
markets of the inputs used in the production of this commodity are perfectly
competitive both from the supply and demand side.
If all the above conditions are satisfied, then we define the situation as one of
monopoly in a single commodity market.
6.1.1 Market Demand Curve is the Average Revenue Curve
The market demand curve in
Figure 6.1 shows the quantities
that consumers as a whole are
willing to purchase at different
prices. If the market price is at the
higher level p
0
, consumers are
willing to purchase the lesser
quantity q
0
. On the other hand, if
the market price is at the lower
level p
1
, consumers are willing to
buy a higher quantity q
1
. That is,
price in the market affects the
quantity demanded by the
consumers. This is also expressed
by saying that the quantity
purchased by the consumers is a
decreasing function of the price.
Competitive Behaviour versus Competitive Structure
A perfectly competitive market has been defined as one where an individual
firm is unable to influence the price at which the product is sold in the
market. Since price remains the same for any level of output of the individual
firm, such a firm is able to sell any quantity that it wishes to sell at the given
market price. It, therefore, does not need to compete with other firms to
obtain a market for its produce.
This is clearly the opposite of the meaning of what is commonly
understood by competition or competitive behaviour. We see that Coke and
Pepsi compete with each other in a variety of ways to achieve a higher level
of sales or a greater share of the market. Conversely, we do not find individual
farmers competing among themselves to sell a larger amount of crop. This
is because both Coke and Pepsi possess the power to influence the market
price of soft drinks, while the individual farmer does not.
Thus, competitive behaviour and competitive market structure are, in
general, inversely related; the more competitive the market structure, less
competitive is the behaviour of the firms. On the other hand, the less
competitive the market structure, the more competitive is the behaviour of
firms towards each other. Pure monopoly is the most visible exception.
Market Demand Curve. Shows the quantities that
consumers as a whole are willing to purchase at
different prices.
are required to be in place to prevent any other firm from entering the market
and to start selling the commodity.
87
Non-competitive Markets
© NCERT
not to be republished
Page 3


Chapter 6
Non-competitive Mark Non-competitive Mark Non-competitive Mark Non-competitive Mark Non-competitive Markets ets ets ets ets
We recall that perfect competition was theorised as a market
structure where both consumers and firms were price takers.
The behaviour of the firm in such circumstances was described
in the Chapter 4. We discussed that the perfect competition
market structure is approximated by a market satisfying the
following conditions:
(i) there exist a very large number of firms and consumers of the
commodity, such that the output sold by each firm is negligibly
small compared to the total output of all the firms combined,
and similarly, the amount purchased by each consumer is
extremely small in comparison to the quantity purchased by
all consumers together;
(ii) firms are free to start producing the commodity or to stop
production;
(iii) the output produced by each firm in the industry is
indistinguishable from the others and the output of any other
industry cannot substitute this output; and
(iv) consumers and firms have perfect knowledge of the output,
inputs and their prices.
In this chapter, we shall discuss situations where one or more
of these conditions are not satisfied. If assumptions (i) and (ii) are
dropped, we get market structures called monopoly and oligopoly.
If assumption (iii) is dropped, we obtain a market structure called
monopolistic competition. Dropping of assumption (iv) is dealt with
as ‘economics of risk’. This chapter will examine the market
structures of monopoly, monopolistic competition and oligopoly.
6.1 SIMPLE MONOPOLY IN THE COMMODITY MARKET
A market structure in which there is a single seller
is called monopoly. The conditions hidden in
this single line definition, however, need to be
explicitly stated. A monopoly market
structure requires that there is a
single producer of a particular
commodity; no other commodity
works as a substitute for
this commodity; and for this
situation to persist over
time, sufficient restrictions ‘I’ ‘M’ Perfect Competition
© NCERT
not to be republished
In order to examine the difference in the equilibrium resulting from a monopoly
in the commodity market as compared to other market structures, we also need
to assume that all other markets remain perfectly competitive. In particular, we
need (i) that the market of the particular commodity is perfectly competitive
from the demand side ie all the consumers are price takers; and (ii) that the
markets of the inputs used in the production of this commodity are perfectly
competitive both from the supply and demand side.
If all the above conditions are satisfied, then we define the situation as one of
monopoly in a single commodity market.
6.1.1 Market Demand Curve is the Average Revenue Curve
The market demand curve in
Figure 6.1 shows the quantities
that consumers as a whole are
willing to purchase at different
prices. If the market price is at the
higher level p
0
, consumers are
willing to purchase the lesser
quantity q
0
. On the other hand, if
the market price is at the lower
level p
1
, consumers are willing to
buy a higher quantity q
1
. That is,
price in the market affects the
quantity demanded by the
consumers. This is also expressed
by saying that the quantity
purchased by the consumers is a
decreasing function of the price.
Competitive Behaviour versus Competitive Structure
A perfectly competitive market has been defined as one where an individual
firm is unable to influence the price at which the product is sold in the
market. Since price remains the same for any level of output of the individual
firm, such a firm is able to sell any quantity that it wishes to sell at the given
market price. It, therefore, does not need to compete with other firms to
obtain a market for its produce.
This is clearly the opposite of the meaning of what is commonly
understood by competition or competitive behaviour. We see that Coke and
Pepsi compete with each other in a variety of ways to achieve a higher level
of sales or a greater share of the market. Conversely, we do not find individual
farmers competing among themselves to sell a larger amount of crop. This
is because both Coke and Pepsi possess the power to influence the market
price of soft drinks, while the individual farmer does not.
Thus, competitive behaviour and competitive market structure are, in
general, inversely related; the more competitive the market structure, less
competitive is the behaviour of the firms. On the other hand, the less
competitive the market structure, the more competitive is the behaviour of
firms towards each other. Pure monopoly is the most visible exception.
Market Demand Curve. Shows the quantities that
consumers as a whole are willing to purchase at
different prices.
are required to be in place to prevent any other firm from entering the market
and to start selling the commodity.
87
Non-competitive Markets
© NCERT
not to be republished
88
Introductory Microeconomics
For the monopoly firm, the above argument expresses itself from the reverse
direction. The monopoly firm’s decision to sell a larger quantity is possible only
at a lower price. Conversely, if the monopoly firm brings a smaller quantity of
the commodity into the market for sale it will be able to sell at a higher price.
Thus, for the monopoly firm, the price depends on the quantity of the commodity
sold. The same is also expressed by stating that price is a decreasing function of
the quantity sold. Thus, for the monopoly firm, the market demand curve
expresses the price that is available for different quantities supplied. This idea is
reflected in the statement that the monopoly firm faces the market demand curve.
The above idea can be viewed from another angle. Since the firm is assumed
to have perfect knowledge of the market demand curve, the monopoly firm can
decide the price at which it wishes to sell its commodity, and therefore, determines
the quantity to be sold. For instance, examining Figure 6.1 again, since the
monopoly firm is aware of the shape of the curve DD, if it wishes to sell the
commodity at the price p
0
, it can do so by producing and selling quantity q
0
,
since at the price p
0
, consumers are willing to purchase the quantity q
0
. This
idea is concretised in the slogan: ‘Monopoly firm is a price maker’.
The contrast with the firm in a perfectly competitive market structure should
be clear. In that case, the firm could bring into the market as much quantity of
the commodity as it wished and could sell it at the same price. Since this does
not happen for a monopoly firm, the amount of money received by the firm
through the sale of the commodity has to be examined again.
We do this exercise through a schedule, a graph, and using a simple equation
of a straight line demand curve. As an example, let the demand function be
given by the equation
q = 20 – 2p,
where q is the quantity sold and p is the price in rupees.
The equation can be written in terms of p as
p = 10 – 0.5q
Substituting different values of q from 0 to 13 gives us the prices from 10
to 3.5. These are shown in the q and p
columns of Table 6.1.
These numbers are depicted in a graph in
Figure 6.2 with prices on the vertical axis and
quantities on the horizontal axis. The prices
that are available for different quantities of the
commodity are shown by the solid straight
line D.
The total revenue (TR) received by the firm
from the sale of the commodity equals the
product of the price and the quantity sold. In
the case of the monopoly firm, the total revenue
is not a straight line. Its shape depends on the
shape of the demand curve. Mathematically,
TR is represented as a function of the quantity
sold. Hence, in our example
TR = p × q
= (10 – 0.5q) × q
= 10q – 0.5q
2
qp TR AR MR
010 0 – –
1 9.5 9.5 9.5 9.5
2 9 18 9 8.5
3 8.5 25.5 8.5 7.5
4 8 32 8 6.5
5 7.5 37.5 7.5 5.5
6 7 42 7 4.5
7 6.5 45.5 6.5 3.5
8 6 48 6 2.5
9 5.5 49.5 5.5 1.5
10 5 50 5 0.5
11 4.5 49.5 4.5 -0.5
12 4 48 4 -1.5
13 3.5 45.5 3.5 -2.5
Table 6.1: Prices and Revenue
© NCERT
not to be republished
Page 4


Chapter 6
Non-competitive Mark Non-competitive Mark Non-competitive Mark Non-competitive Mark Non-competitive Markets ets ets ets ets
We recall that perfect competition was theorised as a market
structure where both consumers and firms were price takers.
The behaviour of the firm in such circumstances was described
in the Chapter 4. We discussed that the perfect competition
market structure is approximated by a market satisfying the
following conditions:
(i) there exist a very large number of firms and consumers of the
commodity, such that the output sold by each firm is negligibly
small compared to the total output of all the firms combined,
and similarly, the amount purchased by each consumer is
extremely small in comparison to the quantity purchased by
all consumers together;
(ii) firms are free to start producing the commodity or to stop
production;
(iii) the output produced by each firm in the industry is
indistinguishable from the others and the output of any other
industry cannot substitute this output; and
(iv) consumers and firms have perfect knowledge of the output,
inputs and their prices.
In this chapter, we shall discuss situations where one or more
of these conditions are not satisfied. If assumptions (i) and (ii) are
dropped, we get market structures called monopoly and oligopoly.
If assumption (iii) is dropped, we obtain a market structure called
monopolistic competition. Dropping of assumption (iv) is dealt with
as ‘economics of risk’. This chapter will examine the market
structures of monopoly, monopolistic competition and oligopoly.
6.1 SIMPLE MONOPOLY IN THE COMMODITY MARKET
A market structure in which there is a single seller
is called monopoly. The conditions hidden in
this single line definition, however, need to be
explicitly stated. A monopoly market
structure requires that there is a
single producer of a particular
commodity; no other commodity
works as a substitute for
this commodity; and for this
situation to persist over
time, sufficient restrictions ‘I’ ‘M’ Perfect Competition
© NCERT
not to be republished
In order to examine the difference in the equilibrium resulting from a monopoly
in the commodity market as compared to other market structures, we also need
to assume that all other markets remain perfectly competitive. In particular, we
need (i) that the market of the particular commodity is perfectly competitive
from the demand side ie all the consumers are price takers; and (ii) that the
markets of the inputs used in the production of this commodity are perfectly
competitive both from the supply and demand side.
If all the above conditions are satisfied, then we define the situation as one of
monopoly in a single commodity market.
6.1.1 Market Demand Curve is the Average Revenue Curve
The market demand curve in
Figure 6.1 shows the quantities
that consumers as a whole are
willing to purchase at different
prices. If the market price is at the
higher level p
0
, consumers are
willing to purchase the lesser
quantity q
0
. On the other hand, if
the market price is at the lower
level p
1
, consumers are willing to
buy a higher quantity q
1
. That is,
price in the market affects the
quantity demanded by the
consumers. This is also expressed
by saying that the quantity
purchased by the consumers is a
decreasing function of the price.
Competitive Behaviour versus Competitive Structure
A perfectly competitive market has been defined as one where an individual
firm is unable to influence the price at which the product is sold in the
market. Since price remains the same for any level of output of the individual
firm, such a firm is able to sell any quantity that it wishes to sell at the given
market price. It, therefore, does not need to compete with other firms to
obtain a market for its produce.
This is clearly the opposite of the meaning of what is commonly
understood by competition or competitive behaviour. We see that Coke and
Pepsi compete with each other in a variety of ways to achieve a higher level
of sales or a greater share of the market. Conversely, we do not find individual
farmers competing among themselves to sell a larger amount of crop. This
is because both Coke and Pepsi possess the power to influence the market
price of soft drinks, while the individual farmer does not.
Thus, competitive behaviour and competitive market structure are, in
general, inversely related; the more competitive the market structure, less
competitive is the behaviour of the firms. On the other hand, the less
competitive the market structure, the more competitive is the behaviour of
firms towards each other. Pure monopoly is the most visible exception.
Market Demand Curve. Shows the quantities that
consumers as a whole are willing to purchase at
different prices.
are required to be in place to prevent any other firm from entering the market
and to start selling the commodity.
87
Non-competitive Markets
© NCERT
not to be republished
88
Introductory Microeconomics
For the monopoly firm, the above argument expresses itself from the reverse
direction. The monopoly firm’s decision to sell a larger quantity is possible only
at a lower price. Conversely, if the monopoly firm brings a smaller quantity of
the commodity into the market for sale it will be able to sell at a higher price.
Thus, for the monopoly firm, the price depends on the quantity of the commodity
sold. The same is also expressed by stating that price is a decreasing function of
the quantity sold. Thus, for the monopoly firm, the market demand curve
expresses the price that is available for different quantities supplied. This idea is
reflected in the statement that the monopoly firm faces the market demand curve.
The above idea can be viewed from another angle. Since the firm is assumed
to have perfect knowledge of the market demand curve, the monopoly firm can
decide the price at which it wishes to sell its commodity, and therefore, determines
the quantity to be sold. For instance, examining Figure 6.1 again, since the
monopoly firm is aware of the shape of the curve DD, if it wishes to sell the
commodity at the price p
0
, it can do so by producing and selling quantity q
0
,
since at the price p
0
, consumers are willing to purchase the quantity q
0
. This
idea is concretised in the slogan: ‘Monopoly firm is a price maker’.
The contrast with the firm in a perfectly competitive market structure should
be clear. In that case, the firm could bring into the market as much quantity of
the commodity as it wished and could sell it at the same price. Since this does
not happen for a monopoly firm, the amount of money received by the firm
through the sale of the commodity has to be examined again.
We do this exercise through a schedule, a graph, and using a simple equation
of a straight line demand curve. As an example, let the demand function be
given by the equation
q = 20 – 2p,
where q is the quantity sold and p is the price in rupees.
The equation can be written in terms of p as
p = 10 – 0.5q
Substituting different values of q from 0 to 13 gives us the prices from 10
to 3.5. These are shown in the q and p
columns of Table 6.1.
These numbers are depicted in a graph in
Figure 6.2 with prices on the vertical axis and
quantities on the horizontal axis. The prices
that are available for different quantities of the
commodity are shown by the solid straight
line D.
The total revenue (TR) received by the firm
from the sale of the commodity equals the
product of the price and the quantity sold. In
the case of the monopoly firm, the total revenue
is not a straight line. Its shape depends on the
shape of the demand curve. Mathematically,
TR is represented as a function of the quantity
sold. Hence, in our example
TR = p × q
= (10 – 0.5q) × q
= 10q – 0.5q
2
qp TR AR MR
010 0 – –
1 9.5 9.5 9.5 9.5
2 9 18 9 8.5
3 8.5 25.5 8.5 7.5
4 8 32 8 6.5
5 7.5 37.5 7.5 5.5
6 7 42 7 4.5
7 6.5 45.5 6.5 3.5
8 6 48 6 2.5
9 5.5 49.5 5.5 1.5
10 5 50 5 0.5
11 4.5 49.5 4.5 -0.5
12 4 48 4 -1.5
13 3.5 45.5 3.5 -2.5
Table 6.1: Prices and Revenue
© NCERT
not to be republished
89
Non-competitive Markets
This is not the equation of a
straight line. It is a quadratic
equation in which the squared
term has a negative cofficient.
Such an equation represents an
inverted vertical parabola.
In Table 6.1, the TR column
represents the product of the p
and q columns. It can be noticed
that as the quantity increases, TR
increases to Rs 50 when output
becomes 10 units, and after this
level of output, total revenue
starts declining. The same is
visible in Figure 6.2.
The revenue received by the
firm per unit of commodity sold
is called the Average Revenue (AR). Mathematically, AR = TR/q. In Table 6.1, the
AR column provides values obtained by dividing TR values by q values. It can
be seen that the AR values turn out to be the same as the values in the p column.
This is only to be expected
AR = 
TR
q
Since TR = p × q, substituting this into the AR equation
AR = 
() pq
q
×
 = p
As seen earlier, the p values represent the market demand curve as shown
in Figure 6.2. The AR curve will therefore lie exactly on the market demand
curve. This is expressed by the statement that the market demand curve is
the average revenue curve for the
monopoly firm.
Graphically, the value of AR
can be found from the TR curve
for any level of quantity sold
through a simple construction
given in Figure 6.3. When quantity
is of 6 units, draw a vertical line
passing through the value 6 on
the horizontal axis. This line will
cut the TR curve at the point
marked ‘a’ at a height equal to 42.
Draw a straight line joining the
origin O and point ‘a’. The slope
of this ray from the origin to a
point on the TR provides the value
of AR. The slope of this ray is equal
to 7. Therefore, AR has the value
7. The same can be verified from
Table 6.1.
Relation between Average Revenue and
Total Revenue Curves. The average revenue
at any level of output is given by the slope of the
line joining the origin and the point on the total
revenue curve corresponding to the output level
under consideration.
Total, Average and Marginal Revenue Curves:
The total revenue, average revenue and the marginal
revenue curves are depicted here.
© NCERT
not to be republished
Page 5


Chapter 6
Non-competitive Mark Non-competitive Mark Non-competitive Mark Non-competitive Mark Non-competitive Markets ets ets ets ets
We recall that perfect competition was theorised as a market
structure where both consumers and firms were price takers.
The behaviour of the firm in such circumstances was described
in the Chapter 4. We discussed that the perfect competition
market structure is approximated by a market satisfying the
following conditions:
(i) there exist a very large number of firms and consumers of the
commodity, such that the output sold by each firm is negligibly
small compared to the total output of all the firms combined,
and similarly, the amount purchased by each consumer is
extremely small in comparison to the quantity purchased by
all consumers together;
(ii) firms are free to start producing the commodity or to stop
production;
(iii) the output produced by each firm in the industry is
indistinguishable from the others and the output of any other
industry cannot substitute this output; and
(iv) consumers and firms have perfect knowledge of the output,
inputs and their prices.
In this chapter, we shall discuss situations where one or more
of these conditions are not satisfied. If assumptions (i) and (ii) are
dropped, we get market structures called monopoly and oligopoly.
If assumption (iii) is dropped, we obtain a market structure called
monopolistic competition. Dropping of assumption (iv) is dealt with
as ‘economics of risk’. This chapter will examine the market
structures of monopoly, monopolistic competition and oligopoly.
6.1 SIMPLE MONOPOLY IN THE COMMODITY MARKET
A market structure in which there is a single seller
is called monopoly. The conditions hidden in
this single line definition, however, need to be
explicitly stated. A monopoly market
structure requires that there is a
single producer of a particular
commodity; no other commodity
works as a substitute for
this commodity; and for this
situation to persist over
time, sufficient restrictions ‘I’ ‘M’ Perfect Competition
© NCERT
not to be republished
In order to examine the difference in the equilibrium resulting from a monopoly
in the commodity market as compared to other market structures, we also need
to assume that all other markets remain perfectly competitive. In particular, we
need (i) that the market of the particular commodity is perfectly competitive
from the demand side ie all the consumers are price takers; and (ii) that the
markets of the inputs used in the production of this commodity are perfectly
competitive both from the supply and demand side.
If all the above conditions are satisfied, then we define the situation as one of
monopoly in a single commodity market.
6.1.1 Market Demand Curve is the Average Revenue Curve
The market demand curve in
Figure 6.1 shows the quantities
that consumers as a whole are
willing to purchase at different
prices. If the market price is at the
higher level p
0
, consumers are
willing to purchase the lesser
quantity q
0
. On the other hand, if
the market price is at the lower
level p
1
, consumers are willing to
buy a higher quantity q
1
. That is,
price in the market affects the
quantity demanded by the
consumers. This is also expressed
by saying that the quantity
purchased by the consumers is a
decreasing function of the price.
Competitive Behaviour versus Competitive Structure
A perfectly competitive market has been defined as one where an individual
firm is unable to influence the price at which the product is sold in the
market. Since price remains the same for any level of output of the individual
firm, such a firm is able to sell any quantity that it wishes to sell at the given
market price. It, therefore, does not need to compete with other firms to
obtain a market for its produce.
This is clearly the opposite of the meaning of what is commonly
understood by competition or competitive behaviour. We see that Coke and
Pepsi compete with each other in a variety of ways to achieve a higher level
of sales or a greater share of the market. Conversely, we do not find individual
farmers competing among themselves to sell a larger amount of crop. This
is because both Coke and Pepsi possess the power to influence the market
price of soft drinks, while the individual farmer does not.
Thus, competitive behaviour and competitive market structure are, in
general, inversely related; the more competitive the market structure, less
competitive is the behaviour of the firms. On the other hand, the less
competitive the market structure, the more competitive is the behaviour of
firms towards each other. Pure monopoly is the most visible exception.
Market Demand Curve. Shows the quantities that
consumers as a whole are willing to purchase at
different prices.
are required to be in place to prevent any other firm from entering the market
and to start selling the commodity.
87
Non-competitive Markets
© NCERT
not to be republished
88
Introductory Microeconomics
For the monopoly firm, the above argument expresses itself from the reverse
direction. The monopoly firm’s decision to sell a larger quantity is possible only
at a lower price. Conversely, if the monopoly firm brings a smaller quantity of
the commodity into the market for sale it will be able to sell at a higher price.
Thus, for the monopoly firm, the price depends on the quantity of the commodity
sold. The same is also expressed by stating that price is a decreasing function of
the quantity sold. Thus, for the monopoly firm, the market demand curve
expresses the price that is available for different quantities supplied. This idea is
reflected in the statement that the monopoly firm faces the market demand curve.
The above idea can be viewed from another angle. Since the firm is assumed
to have perfect knowledge of the market demand curve, the monopoly firm can
decide the price at which it wishes to sell its commodity, and therefore, determines
the quantity to be sold. For instance, examining Figure 6.1 again, since the
monopoly firm is aware of the shape of the curve DD, if it wishes to sell the
commodity at the price p
0
, it can do so by producing and selling quantity q
0
,
since at the price p
0
, consumers are willing to purchase the quantity q
0
. This
idea is concretised in the slogan: ‘Monopoly firm is a price maker’.
The contrast with the firm in a perfectly competitive market structure should
be clear. In that case, the firm could bring into the market as much quantity of
the commodity as it wished and could sell it at the same price. Since this does
not happen for a monopoly firm, the amount of money received by the firm
through the sale of the commodity has to be examined again.
We do this exercise through a schedule, a graph, and using a simple equation
of a straight line demand curve. As an example, let the demand function be
given by the equation
q = 20 – 2p,
where q is the quantity sold and p is the price in rupees.
The equation can be written in terms of p as
p = 10 – 0.5q
Substituting different values of q from 0 to 13 gives us the prices from 10
to 3.5. These are shown in the q and p
columns of Table 6.1.
These numbers are depicted in a graph in
Figure 6.2 with prices on the vertical axis and
quantities on the horizontal axis. The prices
that are available for different quantities of the
commodity are shown by the solid straight
line D.
The total revenue (TR) received by the firm
from the sale of the commodity equals the
product of the price and the quantity sold. In
the case of the monopoly firm, the total revenue
is not a straight line. Its shape depends on the
shape of the demand curve. Mathematically,
TR is represented as a function of the quantity
sold. Hence, in our example
TR = p × q
= (10 – 0.5q) × q
= 10q – 0.5q
2
qp TR AR MR
010 0 – –
1 9.5 9.5 9.5 9.5
2 9 18 9 8.5
3 8.5 25.5 8.5 7.5
4 8 32 8 6.5
5 7.5 37.5 7.5 5.5
6 7 42 7 4.5
7 6.5 45.5 6.5 3.5
8 6 48 6 2.5
9 5.5 49.5 5.5 1.5
10 5 50 5 0.5
11 4.5 49.5 4.5 -0.5
12 4 48 4 -1.5
13 3.5 45.5 3.5 -2.5
Table 6.1: Prices and Revenue
© NCERT
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89
Non-competitive Markets
This is not the equation of a
straight line. It is a quadratic
equation in which the squared
term has a negative cofficient.
Such an equation represents an
inverted vertical parabola.
In Table 6.1, the TR column
represents the product of the p
and q columns. It can be noticed
that as the quantity increases, TR
increases to Rs 50 when output
becomes 10 units, and after this
level of output, total revenue
starts declining. The same is
visible in Figure 6.2.
The revenue received by the
firm per unit of commodity sold
is called the Average Revenue (AR). Mathematically, AR = TR/q. In Table 6.1, the
AR column provides values obtained by dividing TR values by q values. It can
be seen that the AR values turn out to be the same as the values in the p column.
This is only to be expected
AR = 
TR
q
Since TR = p × q, substituting this into the AR equation
AR = 
() pq
q
×
 = p
As seen earlier, the p values represent the market demand curve as shown
in Figure 6.2. The AR curve will therefore lie exactly on the market demand
curve. This is expressed by the statement that the market demand curve is
the average revenue curve for the
monopoly firm.
Graphically, the value of AR
can be found from the TR curve
for any level of quantity sold
through a simple construction
given in Figure 6.3. When quantity
is of 6 units, draw a vertical line
passing through the value 6 on
the horizontal axis. This line will
cut the TR curve at the point
marked ‘a’ at a height equal to 42.
Draw a straight line joining the
origin O and point ‘a’. The slope
of this ray from the origin to a
point on the TR provides the value
of AR. The slope of this ray is equal
to 7. Therefore, AR has the value
7. The same can be verified from
Table 6.1.
Relation between Average Revenue and
Total Revenue Curves. The average revenue
at any level of output is given by the slope of the
line joining the origin and the point on the total
revenue curve corresponding to the output level
under consideration.
Total, Average and Marginal Revenue Curves:
The total revenue, average revenue and the marginal
revenue curves are depicted here.
© NCERT
not to be republished
90
Introductory Microeconomics
6.1.2 Total, Average and Marginal Revenues
A more careful glance at Table 6.1 reveals that TR does not increase by the
same amount for every unit increase in quantity. Sale of the first unit leads to
a change in TR from Rs 0 when quantity is of 0 unit to Rs 9.50 when quantity
is 1 unit, i.e., a rise of Rs 9.50. As the quantity increases further, the rise in TR
is smaller. For example, for the 5
th
 unit of the commodity, the rise in TR is
Rs 5.50 (Rs 37.50 for 5 units minus Rs 32 for 4 units). As mentioned earlier,
after 10 units of output, TR starts declining. This implies that bringing more
than 10 units for sale leads to a level of TR less than Rs 50. Thus, the rise in TR
due to the 12th unit is: 48 – 49.50 = –1.5, ie a fall of Rs 1.50.
This change in TR due to the sale of an additional unit is termed Marginal
Revenue (MR). In Table 6.1, this is depicted in the last column. The values in
every row of the MR column after the first equal the TR value in that row minus
the TR value in the previous row. In the last paragraph, it was shown that TR
increases more slowly as quantity sold increases and falls after quantity reaches
10 units. The same can be viewed through the MR values which fall as q
increases. After the quantity reaches 10 units, MR has negative values. In Figure
6.2, MR is depicted by the dotted line.
Graphically, the values of
the MR curve are given by the
slope of the TR curve. The slope
of any smooth curve is defined
as the slope of the tangent to the
curve at that point. This is
depicted in Figure 6.4. At point
‘a’ on the TR curve, the value of
MR is given by the slope of the
line L
1
, and at point ‘b’ by the
line L
2
. It can be seen that both
lines have positive slope, but the
line L
2
 is flatter than line L
1
, ie
its slope is lesser. The value of
MR for the same level of quantity
is also lesser. When 10 units of
the commodity are sold, the
tangent to the TR is horizontal,
ie its slope is zero. The value of
the MR for the same quantity is zero. At point ‘d’ on the TR curve, where the
tangent is negatively sloped, the MR takes a negative value.
We can now conclude that when total revenue is rising, marginal revenue
is positive, and when total revenue shows a fall, marginal revenue is negative.
Another relation can be seen between the AR and the MR curves. Figure
6.2 shows that the MR curve lies below the AR curve. The same can be seen in
Table 6.1 where the values of MR at any level of output are lower than the
corresponding values of AR. We can conclude that if the AR curve (ie the demand
curve) is falling steeply, the MR curve is far below the AR curve. On the other
hand, if the AR curve is less steep, the vertical distance between the AR and
MR curves is smaller. Figure 6.5(a) shows a flatter AR curve while Figure 6.5(b)
shows a steeper AR curve. For the same units of the commodity, the difference
between AR and MR in panel (a) is smaller than the difference in panel (b).
Relation between Marginal Revenue and Total
Revenue Curves. The marginal revenue at any level
of output is given by the slope of the total revenue
curve at that level of output.
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