Forms of Market - Concepts of Total Average and Marginal Revenue

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What are Market Structures?

The Markets are of varying types with varying characteristics, this structuring of its types is known as ‘Market Structures’. The structures highlight the relation between the sellers to each other, sellers to the buyers and more. The markets are being structured with the basic points as below:

  • The commodity or item which is sold and the extent of its production.

  • Process of entering and exiting the market.

  • Distribution of market share for the largest firms.

  • The number of companies working in the market.

  • The number of buyers working in the market, and also their authorizing power. 

  • The relationship between sellers in the market.

In our next section, we will learn about the different structures quite in detail. 


Pure Competition

This market structure is defined by a large number of small firms that are sustaining the perfect competition in this market form. The firms in this structure compete against each other and hence this type is also known as ‘Pure Competition’. A single firm does not have a great influence on this structure. Hence, they are the price-takers. 


Monopolistic Competition

Monopolistic competition is a type of market structure that is being referred to a large number of small firms who compete against each other. The firms in a monopolistic competition sell similar but differentiated products. 


Oligopoly

Oligopoly is dominated by a few firms, which results in a competition, that is being limited in their own scope. They can collaborate with or compete against each other to use their market power to drive up the market prices and to earn more profit.


Pure Monopoly

A monopoly exists when there’s a single firm that is ruling the entire market. That is the firm controls the market, influences the price operating in the market significantly. The firm and industry are synonymous terms used in this case. This firm is the sole producer of that particular product. Monopolies are price-maker.


Concepts of Total Revenue

A firm selling 500 units of a particular commodity for Rs. 10 each. So, the amount which is being realized by the firm is – Rs. 5,000 (500 x 10). This is called the total revenue for the firm.

Hence, we can say the total revenue of the firm as by a firm on the sale of a commodity. 


Average Revenue 

After we obtain the TR or the Total Revenue, we can easily find the Average Revenue.

As we know, total revenue can be obtained by multiplying the quantity of output sold by the market price of the product (P.Q). While average revenue is revenue earned per unit of output. Hence, Average revenue can be obtained by dividing the total revenue by the number of units sold.


Marginal Revenue

Marginal revenue abbreviated as MR is the increase in the revenue that resulted from the sale of one additional unit of the output. The marginal revenue remains constant over a certain level of output, and it follows from the law of diminishing returns, which will slow down as the output level increases. In the economic theory, the perfectly competitive firms continue to produce output unless the marginal revenue equals the marginal cost.


Marginal Revenue Formula

The formula for marginal revenue is to be expressed as follows:

Change in Total Revenue / Change in Quantity Sold


Total Revenue Formula 

Total revenue is calculated with the following formula:

TR = P * Q 

Or,

Total Revenue = Price * Quantity.


Average Revenue Formula

The average Revenue Formula is as follows: 

AR = TR/Q

Or,

Average revenue = total revenue/total output sold

FAQ (Frequently Asked Questions)

1. What Do You Mean By Price-Takers and Price-Makers?

Ans. Both the terms are opposite to each other. Price takers are destined to accept the prevailing market price and sell each unit at that particular market price. Price takers are generally the case of perfectly competitive markets. While the Price makers are able to influence the market price and enjoy their high or low pricing according to their will power. A producer who has no power to influence prices are the price-takers. They can alter the rate of production and sales without greatly affecting the market price of its product. On the other hand, the price-makers who make their own prices are generally the firms operating in the pure monopoly market.

2. Define Law of Diminishing Marginal Utility?

Ans. The Law of Diminishing Marginal Utility says that when consumption increases, the marginal utility derived from one additional unit declines. The Marginal utility is derived as the change in utility as an additional unit that is consumed.

The law of diminishing marginal utility explains that a person consumes an item or a product, for the satisfaction or for the utility which is derived from the product as they consume more and more of that product. 

3. Give an Example of a Monopoly.

Ans. A monopoly is a firm that has the power to be a sole seller of its product, and where there are no close or equal substitutes. An unregulated monopoly has market power and can influence the prices of the market.

Examples: Microsoft and Windows, DeBeers and diamonds, the local natural gas company. In today’s juncture, the most famous United States monopolies, which is known largely for their historical significance, are Andrew Carnegie's Steel Company, John D. Rockefeller's Standard Oil Company, and the American Tobacco Company.