# The Theory of the Firm under Perfect Competition Class 12 Notes Economics Part A Chapter 4

#### Lesson at a Glance

Revenue: The amount of money that a producer receives in exchange for the sale proceeds is known as revenue. For example, if a firm gets 16,000 from sale of 100 chairs, then the amount of 16,000 is known as revenue. In the words of Dooley, “The revenue of a firm is its sales receipts or money receipts from the sales of a product.” It is also called sale proceeds.

Total Revenue (TR): Total Revenue refers to total receipts from the sale of a given quantity of a commodity. It is the total income of a firm. Total revenue is obtained by multiplying the quantity of the commodity sold by the price of the commodity.
Total Revenue = Quantity × Price
For example, if a firm sells 10 chairs at a price of rs.160 per chair, then the total revenue will be: 10 chairs × rs.160 = rs.1,600.

Average Revenue (AR): Average revenue refers to revenue per unit of output sold. It is obtained by dividing the total revenue by the number of units sold.

For example, if total revenue from the sales of 10 chairs @ rs. 160 per chair is ` 1,600, then average revenue will be: 1,600
= rs. 160/60

NOTE: AR is the price of the commodity if and only all units are being sold at the same price. If producer charges different price for different units of the product then AR will not be equal to the Price. But in real life we see that most of the times, (except for discriminating monopoly) a seller charges same price for all the units of a product and hence, AR is equal to price.

Marginal Revenue (MR): MR is addition made to total revenue when one more unit of output is sold.
Marginal Revenue = Change in Total Revenue ÷ Change in
Quantity or Marginal Revenue = TRn – TRn–1

FIRM’S REVENUE CURVE IN DIFFERENT MARKETS

(i) Revenue Curves under Perfectly Competitive Market or Perfect Competition: Under perfect competition, a firm is only a price-taker. It can sell any number of units of output at the prevailing price. If a firm tries to sell at a price higher than market price, it will lose its entire customer, because they are fully aware of market condition. In other words, no firm under perfect competition can charge a price higher than the prevailing market price. Nor can it afford to charge a price less than the prevailing market price.

Hence,its marginal revenue is equal to its average revenue (price). It is shown in figure given above. The horizontal straight line represents both marginal as well as average revenue and price. Thus, firm’s AR and MR curves are perfectly elastic under perfect competition.

(ii) Revenue Curves under Monopoly: Under monopoly, the average revenue curve and marginal revenue curve slope downwards from left to right. It means that if a monopolist desires to sell more units of the output, he will have to reduce the price. On the other hand, if the monopolist desires to charge high price, he will be able to sell less units of output. In other words, there is negative relationship between the demand for the product of monopolist and its price.

(iii) Revenue curves under monopolistic competition: Revenue curves under monopolistic competition are similar to monopoly. The main difference between monopoly and monopolistic competition is that under monopolistic competition, AR and MR curves are more elastic. It means that when a monopoly firm raises the price, the demand will fall proportionately less for a firm/under monopoly than under monopolistic competition.

On the other hand, if a firm under monopolistic competition falls the price, the proportionate rise in its demand will be more than a monopoly. It is so because in a monopolistic competitive market, goods have their substitutes and buyers are equally attracted towards them. If one firm raises the prices of its products, the buyers will shift their demand to the substitute product whose price remains unchanged. Hence, demond curve is more elastic under monopolistic competition than under monopoly.

Supply : Supply of a commodity means quantity of the commodity which a firm or an industry is willing to sell at a given price during given period of time. Like demand, supply definition is complete when it has the following elements:
(i) Quantity of a commodity that the producer is willing to offer for sale;
(ii) Price of the commodity; and
(iii) Time during which the quantity is offered for sale.

For example: Firm A supplies 50 kg. of wheat at price of Rs.10 per kg. in a month is a statement of supply. Like demand, supply also can be either for a single seller (Individual Supply) or for all the seller (Market Supply).

1. Individual Supply refers to quantity of a commodity that an individual firm is willing and able to offer for sale at each possible price during a given period of time.

2. Market Supply refers to quantity of a commodity that all the firms are willing and able to offer for sale at each possible price during a given period of time.

FACTORS AFFECTING SUPPLY

(a) Price of the commodity itself;
(b) Price of other goods;
(c) Price of input used or cost of production;
(d) Number of firms;
(e) Technology
(f) Government policy related to taxes and subsidies.

SUPPLY & QUANTITY SUPPLIED

1. Change in Quantity Supplied: Whenever supply for the given commodity changes due to changes in its own price, then such change in supply is known as “Change in Quantity Supplied”. For example, if supply of CloseUp changes due to change in its own price, then such change in supply for Close-up is known as change in quantity supplied.

2. Change in Supply: Whenever supply for the given commodity change due to factors other than price, then such change in supply is known as “Change in Supply”.For example, If supply of close-Up changes due to change in price of other goods or due to change in technology or due to change in taxation policy, then such change in supply for Close-Up is known as change in supply.

LAW OF SUPPLY

Statement : Law of Supply states that as price of the commodity rises, there is more supply of that commodity in the market and vice-versa, i.e., quantity supplied of a commodity is directly related to the price of the commodity.The law states that other things remaining the same, the producers will supply more quantity of goods at a higher price and less quantity of goods at a lower price.

Price Elasticity of Supply: Alfred Marshall developed the concept of elasticity of supply. Price elasticity of supply is defined as the responsiveness of quantity supplied of a commodity to changes in its own price. The value of elasticity of supply will give the degree or quantity of change in supply to a change in price.

Methods of Measuring Price Elasticity of Supply:

• Percentage method
• Geometric Method

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