Friday, July 13, 2012

COST, REVENUE & MARKET STRUCTURE


            Chapter - 4

COST, REVENUE & MARKET STRUCTURE

COST


Meaning of cost :- In ordinary sense, cost of production means the money expenditure incurred by a business firm for the resources used to produce of product

Classification of cost or types of cost

  1. Money cost or nominal cost : Money cost or nominal cost refers to the payments for materials, wages and salaries for labour, power and fuel, rent, insurance, transport charges, repairs of machines and equipments, taxes etc.
  2. Real cost : The term ‘real cost’ has been interpreted in different ways by different authorities. Adam smith regarded pains and sacrifices of labour as real cost.
  3. Actual cost : Actual costs mean the actual expenditure incurred for acquiring or producing a product or service. These are the costs that are generally recorded in the books of account. Actual costs of raw material purchased, actual wages paid, interest paid etc.
  4. Opportunity cost : the concept of opportunity cost was first introduced by Vleser, an Austrian economist. Later on, other economists like Knight, Davenport, Wickstead, and Robinson developed this concept.
  5. Explicit costs : Explicit costs refers to payment made by a firm for purchasing of hiring productive resources. They consist of payments made for raw material and semi-finished materials, wages and salaries of workers and employees and overhead cost of payments.
  6. Implicit costs or Imputed costs : Implicit costs refer to the value of the firm’s own efforts and sacrifices incurred on production. In other words, implied costs refer to revenue which the firm should realise for the self-owned and self employed resources. In short, the earnings of factors of production belonging to the owners themselves are called implicit costs.
  7. Fixed costs : Fixed costs ,also known as supplementary costs, indirect costs, overhead costs and general cost, refer to costs which do not changes with a change in the level of output. They are independent of output, i.e., they do not depend upon output.
  8. Variable costs : Variable costs, also known as prime costs, direct costs and special costs, refers to costs which vary (i.e., change with a change in output.)

Differences between Fixed and Variable costs :
The main difference between two are :

                      I.    Total fixed costs will not change with a change in output, whereas total variable costs will change with the change in output.
                    II.    Fixed costs are incurred even if production is stopped. But if  the production is stopped, there will not be any variable cost.
                   III.    Fixed cost per unit of production will change with a change in output, whereas variable costs per unit of production will not change with a change in output.
                  IV.    The concept of fixed costs is relevant only in the short run. In the long run, all costs are variable. That means, variable costs are relevant in the short run as well as in the long run .
                    V.    Fixed costs bear no relationship to marginal cost in the short run. On the other hand, there is relationship between variable costs and marginal cost.

  1. Total cost : the cost of production of product comprises two parts, namely., fixed costs and variable costs. So, the total cost of production of product is the sum of the total fixed and variable costs. In short, total cost is equal to fixed cost + total variable cost

  1. Average fixed cost : If the total fixed cost of product is divided by number of units produced, we get average fixed cost. In other words, average fixed cost is the fixed cost per unit of production.
The average fixed cost is : 
Total fixed costs
Output or number of units produced

  1. Average variable cost : if the total variable cost of product is dived by number of units produced, we get the average variable cost. In other words, average variable cost is the variable cost of per  unit of production.
The average variable is :
Total variable costs
Output or number of units produced

  1. Average cost : if the total cost of production is divide by the number of units produced, we get the average cost. In other words, average is the cost per  unit of production.

Average cost  =                                            Total cost
Output or number of units produced

Alternatively, if we add the average fixed cost and the average variable cost, we get the average cost. That is the average cost is :
 Average fixed cost + average variable cost

  1. Marginal cost : Marginal cost is the additional cost of producing one more unit. In the other words. It is the addition made to total cost by producing one more unit of                commodity.

Relationship between Average Cost and Marginal Cost :
They are related to each other in the following ways :

                      I.    When the average cost is rising, the marginal cost will be the greater then the average cost.
                    II.    When the average cost is constant, the marginal cost will be less than the average cost.
                   III.    When the average cost is falling, the marginal cost will be less than the average cost.

Schedule Showing Total Fixed, Total Variable and Total Cost


Quantity
Total Fixed
Total
Total

cost
Variable
Cost (TC)


Cost (TVC)
(TFC+TVC)

Rs.
Rs.
Rs.
0
60
0
60
1
60
30
90
2
60
40
100
3
60
45
105
4
60
55
115
5
60
75
135
6
60
120
180

Schedule Showing Total Fixed, Total Variable and Total Cost



Schedule Showing the Total Fixed, Total Variable and Total Cost



Quantity
Total fixed
Total Variable
Total cost
Average fixed
Average variable
Average cost
Marginal

cost (TFC)
cost (TVC)
(TC)
cost (AFC)
cost (AVC)
(A/c)
cost (MC)






(AFC + AVC)


Rs
Rs
Rs
Rs
Rs
Rs
Rs
1
60
30
90
60
30
90
-
2
60
40
100
30
20
50
10
3
60
45
105
20
15
35
5
4
60
55
115
15
13.75
28.75
10
5
60
75
135
12
15
27
20
6
60
120
180
10
12
30
45





Graphic Representation of Total Fixed, Total Variable and Total Cost


















Graphics Representation of Average and Marginal Cost














  1. Short-run Costs : Short-run costs are those costs which vary with output, when fixed plant and capital equipment remain the same. Short-run costs become relevant when a firm has to decide whether or not to produce more in the immediate future.

  1. Long-run costs : long-run costs are those costs which vary with the output when all input factors including plant and equipments vary

REVENUE

Meaning  of  revenue : Revenue   is the market  value  obtained  by  a business  firm  from the sale of its goods  or services .

Total  Revenue  ,Average Revenue and  Marginal  Revenue:

TOTAL  REVENUE

Total  revenue  refers to the  total  receipts of a firm obtained from the dale of its commodity .In other words ,total revenue  is the total sale proceeds from  the sale of output  by  a firm.

Total revenue refers to the total receipts of a firm obtained by multiplying the price per unit of the commodity by the quantity of output sold  (i.e by the total numbers of unit of the commodity sold short the total revenue of a firm) is:

Price  per unit x number of units  sold

Symbolically  total  revenues is  represented as  follows ;
TR=Px Q
Where ‘TR’ refers to total  revenue
            ‘P’ refers to price of the quantity of  goods sold
‘Q’refers to the quantity  of  goods  sold

Let us discuss this point with an example .

Suppose  a car  company  sells 200 cars per month .the price per car is Rs 5,00,000.
in this case ,the  total revenue  will  be :
TR=PxQ
i.e.,5,00,000 x 200 = Rs10,00,00,000.

AVERAGE  REVENUE

Average  revenue refers to the average sale proceeds  or the average receipts per  unit of output .in other words ,it is the average revenue per  unit of the commodity sold.

The average revenue can  be obtained by  dividing the total revenue by
the number of units of a commodity sold . in short .

Average revenue =Total  revenue
Number  of units of a commodity sold

MARGINAL  REVENUE

Marginal revenue is the addition to the total  revenue by the sale of an additional unit of a  commodity .in other words , the revenue added to the total revenue by selling an additional unit is called marginal revenue.

Algebraically,marginal  revenue can be defined as the addition to the total revenue of the firm when it sells ‘n+1’units    of  a product  instead of ‘n’ units .So ,marginal  revenue is represented as follows;
         
             MRn  = TRN-TRn-1
             Where MR n  refers to marginal revenue of ‘n’ unit .
TRn  refers to the total revenue of   ‘n’ unit .
TRn-1  refers to total revenue of one more unit.
Let us discuss this point with an example .
Suppose a firm earns a total revenue of Rs 40,00,000by selling 100
units of a commodity  ,in this case ,the average revenue is ;

TR   , i.e, 40,00,000 = 40,000
Q                  100

Suppose the firm sells one more unit ,i.e.,100+1=101 units , and earns Rs40,38000.in this case , its marginal revenue is Rs 40,38000-40,00,000=38,000.That means ,the marginal revenue is the revenue derived from the sale of an additional unit.

The formula used for  finding out the marginal revenue is

MR=^TR+^Q
Where MR  refers to marginal  revenue
^TR  refers to change  on total revenue
^ Q     refers to change in quantity  sold .

Schedule of  total revenue , average revenue ,average  revenue
And marginal  revenue of a firm;





1
2
3
4
Quantity
Total revenue
Average
Marginal
sold
(AR x 8)
Revenue
revenue
Q

TR/Q
( ^ TR - TR



of previous



quantity )



Rs.
1
15
(15/1) 15
-
2
28
(15/1) 14
(28 - 15) 13
3
39
(15/1) 13
(28 - 15) 11
4
48
(15/1) 12
(28 - 15) 09
5
55
(15/1) 11
(28 - 15) 07
6
60
(15/1) 10
(28 - 15) 05
7
63
(15/1) 09
(28 - 15) 03
8
64
(15/1) 08
(28 - 15) 01
9
63
(15/1) 07
(28 - 15) -1
10
60
(15/1) 06
(28 - 15) -3


Schedule of  total revenue , average revenue ,average  revenue
And marginal  revenue of a firm;

Quantity
Price per
Total
Average
Marginal
in units
unit
revenue
revenue
revenue
Q
P
(TR)
(AR)
(MR)


(Q x P)
(TR/Q)
(TRn TRn-1)

Rs
Rs
Rs
Rs
1
12
12
12
0
2
10
20
10
8
3
8
24
8
4
4
6
24
6
0
5
4
20
4
-4

Graphics Representation of Average and Marginal Revenue

















The Market Structure

Meaning of market structure : the term ‘market’ is derived from Latin term ‘mercatus’ which means trade.

Features of a Market : The main features are  :

  1. The term ‘‘market’’ does not refer to any particular locality of place where goods are bought and sold.
  2. It merely refers to the contact between the buyers and sellers of a particular commodity
  3. It is true that there must be contact between the buyers and sellers of a particular commodity to constitute a market.
  4. There must be perfect or free competition the buyers and sellers of a particular commodity so that a single price prevails for the commodity at any given time.

CONCEPTS OF MARKET STRUCTURE

  1. Perfect competition
Meaning of Perfect market : Perfect competition is a market in which there are many firms selling identical products, with no firm large enough relative to the entire to a market to influence market price. So, perfect market refers to a market or market situation where there is a perfect competition.

Features of Perfect competition : Perfect competition has certain characters they are :

  1. There are large number of buyers and sellers in the market.
  2. There is free competition among buyers and sellers.
  3. No single buyer and seller can influence the price of a commodity by his own action, because the output of supply of individual seller is negligible when compare with total output or supply of industry.
  4. All the buyers and sellers have the perfect or full knowledge of market condition and the prices prevailing the market.
  5. The commodity traded in the market is homogeneous or identical (i.e., the same)
  6. there is   only  one price of commodity throughout the market. The single price for the commodity is determined by the market forces of demand and supply. It is called equilibrium price
  7. there is absence of transport  cost that is ,the sellers do not incur transport   costs .this is partly responsible for the uniform price in the market.
  8.  since the commodity traded in the market is  homogeneous and there is  only one price for the commodity through out the market, the buyer has no  preference for any particular seller, and the seller has  no preference for any particular buyer.
  9.  there is free entry into the  market for sellers  and buyers . and there is also free exit from the marker for the sellers and buyers entering into the market and on the existing sellers or buyers leaving in the market .

ADVANTAGES OF  PERFECT COMPETITION;
Perfect competition has several advantages .the chief benefits of perfect competition are ;

1.    perfect competition between the sellers forces  them to conduct their production efficiently .in other words , perfect competition promotes efficiency in production.
2.    perfect competition promotes the economic progress of the country  .when every productive unit conducts its operations . efficiently, definite ,there will be economic progress.
3.    perfect competition will  lead to increase in the output or supply of goods .
4.    perfect competition between sellers will result in reduction in the prices of goods .the reduction in the prices of goods will benefit the consumers.
5.    perfect competition will  contribute to improvement in the quality of goods . this will be of great help to the consumers.
6.    the free mobility of factors of production present under perfect competition will ensure better rewards for factors of production.
7.    perfect competition brings about equilibrium between demand and supply easily and  quickly.

DIS ADVANTAGES   OF  PERFECT  COMPETITION:
Perfect competition is not without drawbacks ,the chief drawbacks of perfect competition are;

1)    the existence of a large member of Firms in the same industry or market results in duplication of activities or services .
2)    No  doubt , competition id the main spring of efficiency. But if it goes beyond a certain level, it will become ruinous  (i.e., harmful).small firms will be driven out of the field.
3)    Under perfect competition  ,factors  of production are wasted.
4)    Perfect competition results in unnecessary costs, such as wasteful advertising  expenses.
5)    Under perfect competition ,there is the possibility  of production exceeding the demand ,this , in turn , may result in depression , financial loss for the producers, unemployment  

Monopoly market or monopoly:

Meaning of monopoly market or monopoly:
The term  “monopoly” is derived from the greek words “mono” and “poly” .”mono” means  single, and “poly” means selling  .so, literally ,the term ‘monopoly’ means single  selling , i.e., selling controlled  by a single seller .

FEATURES  OF  MONOPOLY:
Monopoly has certain characteristics features ,the main features  are :

  1. there is only a single seller or firm controlling the entire  supply of a commodity or commodities .
  2. the commodity or commodities  , whose entire supply is controlled  by a single seller or firm ,have no close substitutes.
  3. as there is only one firm dealing in the product ,the firm itself constitutes the industry , in other words , in  the monopoly  marker, there is no distinction between the firm and the industry.
  4. as the monopolist can control the supply of the commodity he sells ,he can dictate terms i.e.,  he  can manipulate .
  5. a monopolist aims  at maximizing  his profits by raising the prices of the product or products he sells but whether he can get maximum profits or not depends.

TYPES  OF MONOPOLY;

1)    Natural monopoly :A natural monopoly is one which emerges (i.e., arises ) due to natural foctors like climatic conditions, mineral  resources , etc,the monopoly of jute production held by  west Bengal due to favourable  climate conditions is an example of natural monopoly.
2)    Legal monopoly : A  legal monopoly is one that is provided or granted by  the government under  laws, such as patent rights  ,etc. for instance ,a  manufacturing firm can have legal monopoly by getting patent rights for its products.
3)    A social: A social monopoly is one that is created in the interest of the society, in the case of the supply of certain commodities or services; competition is undesirable in the interest of the society.
4)    Voluntary monopoly: A voluntary monopoly is one that arises through the voluntary combination of several competing firms. a voluntary combination of several competing firms.  a voluntary monopoly can take the form of trusts, pools, and cartels. Syndicates, holdings companies, etc.

ADVANTAGES OF MONOPOLY:
Monopoly has certain advantages, they are;

  1. Monopoly contributes to large scale production and the economies of large scale production, such as division of labour, use of modern machines for production, better utilization of by products etc;
  2. large scale production, facilitated by monopoly, results in lower cost of production and lower prices for consumers.
  3. social monopoly ensures regular supply of quality goods and services at reasonable prices to the society.
  4. monopoly facilitates the elimination of wasteful expenditure.
  5. monopoly  eliminates duplication of services and waste of national resources .
  6. legal monopoly helps the producers to safeguard their business interests.

DISADVANTAGES OF MONOPOLY:
Monopoly has several drawbacks or evils .the chief  evils of monopoly are:

  1. monopoly results in higher prices for consumes
  2. the quality of goods and services offered to consumers  by  a monopoly will be ,generally , poor.
  3. under monopoly, consumers  freedom of choice is restricted.
  4. monopoly may lead to price discrimination ,that is under monopoly ,there is the  possibility of the monopolist charging different prices for different customers.
  5. when there is monopoly ,naturally ,there is the absence of competition ,when there is the absence of competition ,the scope for efficiency ,new invention , progress ,etc is limited.

3.IMPERFECT COMPETITIVE MARKET ,IMPERFECT MARKET OR  IMPERFECT COMPETITION:

Meaning of imperfect market : Imperfect market refers to the market or  market situation where there is imperfect competition .competition is said to be imperfect when any of the essentials or requisites of perfect competition is  absent.

Features  of   imperfect

Features  of   imperfect  competition has many features .the chief  characteristics features of  imperfect  competition  are:

  1. the number of sellers in the market is not large , so ,the sellers   can control the supply of goods, and thereby ,influence the price in the market by their   action.
  2. the products sold by the different sellers are not identical. they are close substitutes .
  3. product differentiated is the hallmark of imperfect competition . that means ,the products sold by the sellers.
  4. as the products are differentiate from one another ,each seller has certain degree of monopoly control over trade .
  5. as the goods  sold  by the sellers are differentiate from one another ,there is no uniform price for the product in the market .several prices prevail in the market for the same product .

DIFFERENCE  BETWEEN PERFECT COMPETITION AND IMPERFECT COMPETITION:

  1. Perfect competition has the features of only competition .but imperfect competition contains the features of both competition  and monopoly.
  2. perfect  competition implies a single market situation , whereas imperfect competition comprises many types of market situation ,such as duopoly ,oligopoly ,and monopolistic  competition.
  3. under perfect  competition ,there are a large number of sellers .but under imperfect .the number of sellers is not large.
  4. the commodity dealt in under perfect competition is homogeneous or identical .but the commodities dealt in under imperfect competition are not identical ,they  are close substitutes or similar.
  5. under perfect competition ,no single seller will be able to control the supply of the product and manipulate its price. But under imperfect competition a single seller can control  the supply of the product .
  6. under perfect competition ,there is a single or uniform price for the product through out the market .but under imperfect competition ,there is no uniform price in the  market for the product.
  7. there is the absence of transport cost under perfect competition ,and the absence of transport cost is  partly responsible for the uniform price in the market . but under imperfect competition.

DUOPOLY
Meaning of duopoly; Duopoly refers to a market situation in which there are only two sellers selling either homogeneous goods or similar goods.
      
      Features of duopoly;

1)    duopoly can be with  or without product differentiation.
2)    the important feature of duopoly is that the individual firm has to carefully consider the indirect effects of its own decision to change its price or output or both.
3)    Since there are two firms producing identical goods under monopoly ,any change in price or output by one firm is bound to effect the  other.
4)    In duopoly ,the two firms are very closely dependent upon each other ,while is no such interdependence under monopoly or perfect competition.

OLIGOPOLY
Meaning  of  oligopoly;
The term ‘oligopoly’   is derived from the greek  word s ‘oligo’, meaning ‘a few’, and ‘pollein’        meaning  ‘to sell’ .so , oligopoly refers to a market situation in which there are a few sellers  selling either practically identical goods or similar goods.

CHARACTERISTICS  FEATURES  OF  OLIGOPOLY;

1)    In oligopoly  ,there are very few sellers dealing in a homogeneous  or slightly differentiated  product ..
2)    in  oligopoly ,each firm control  a large share of the market.
3)    as each firm controls  a  large  share of the  market , it is able to influence the industry price and output.
4)    as each firm can influences the industry price and output it has to take into consideration  the actions and reaction s of other firms ,while determining its price and the level of output.
5)    in a oligopoly situation of oligopoly ,collusion among the firms  is possible. Because  of the collusion ,each firm has monopoly  power and may charge higher price.
6)    in a oligopolistic  situation , each firm has to stick to  its price .if any firm tries to reduce its price  the rival firms will retaliate by a higher reduction in their prices , If  any firm increases its prices the other firm will not follow the same ,that means ,no firm would like to reduce or increase the price , so there is  the existence of price rigidity  in oligopoly .
7)    under oligopoly each firm has to stick to its  prevailing price. So , its has to spend  a lot on advertisement to increase its sales.

MONOLPOLISTIC  COMPETITION;
Meaning of monopolistic competition;
In the words of left witch ,”monopolistic competition is a market situation in which there are many sellers of a particular product , but the product of  each seller is in some way differentiate in the minds of  consumers from the product  of every other seller”.

FEATURES OF MONOPOLISTIC COMPETITION;

1.    THERE Are a large number of sellers  in the market. But  the number of sellers in the market is not  as large as in perfect competition
2.    the products sold by the different sellers are not identical ,but they are not entirely different from each other the products are close substitutes .
3.    product differentiation is the hall mark of monopolistic competition that means the products sold by the sellers (i.e., the close substitute)are differentiate d  from one another through the use of brands , labels , trade marks , designs of packing etc.
4.    as the products are differentiated from one another ,each seller has certain degree of monopoly control over trade but at the same time each seller faces substantial competition from a number of close substitutes .
5.    as the goods sold by the sellers are differentiated from one another , there is no uniform, price for the product in the market  several prices prevail in the market for the same product.
6.    there is also the  existence  of transport cost. That is the sellers incur transport cost in getting the goods to the market  the existence of transport cost is also responsible for the prevalence of different prices in the market  for the same product.
7.    the buyers and seller in the monopolistic market do not have perfect knowledge of the market condition and the   price prevailing in the market.

Differences between monopoly and monopolistic competition ;

1.    in monopoly there is only one seller but in monopolistic competition there are a large number of sellers.
2.    there is the absence of competition in monopoly ,whereas there is competition in monopolistic competition .
3.    there is no product differentiation in monopoly but in monopolistic competition the product of one seller is slightly  differentiate from the products of competitors .
4.    in monopoly the monopolist (i.e., the sole seller) fixes the price independently but in monopolistic competition a seller has to fix his price after  taking into consideration the price policy of  other seller .
5.    a monopoly ,   selling costs do not play  any role ,  whereas a monopolistic competition , selling costs  play an important role .
6.    in monopoly , the entry of new firm is highly difficult . but in monopolistic competition there can be entry of new firm.

MONOPSONY;
Meaning of monopsony;

Monopsony refers to a marker situation in  which there is a single buyer of a commodity or service .

Features of monopsony;
Monopsony has a certain features;

1.    there is only one buyer of goods or services in a market.
2.    competition from buyers who offers substitution outlet is  insignificant .
3.    As there is only one buyer in the market  , the buyer is in a position to determine the price he pays for the goods and services he buys .
4.    just a monopolist   aim at maximizing  his profit , a monopsonist  also aims at maximizing his customer surplus.

DUOPSONY
Meaning of duopsony ;

Duopsony refers to a market situation in which there are only two buyers , buying either homogeneous goods or similar goods .

Features of duopsony;
1.    in duopsony , there are only two buyers , buying identical goods or similar goods,
2.    as there are only two buyers buying controls a large share of the market .
3.    an influence the market considerably , he has to carefully consider the effect of his decision to change the quantum of purchase or the purchase price.


OLIGOPSONY


Meaning of oligopsony; It refers to a market situation in which there are few buyers .

Features of oligopsony;
1.    there  are only a few buyers in a particular market .
2.    each one of the buyer  is of such size that he can influence the price considerably.
3.    each buyer can influence the price , no single buyer can afford to ignore the reactions of his rivals to policy which  he might initiate , say , the offer of a higher price by him .



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