PPT-7 - Lecture notes 2 PDF

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Stage I: stage of Increasing returnsReasons for the increasing returns stage In the first stage, the AP, MP and TP increase due to the following reasons::  1. The fixed factor is indivisible and every increase in variable factor leads to better and better utilisation of the fixed factor. This incr...

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Stage I: stage of Increasing returns Reasons for the increasing returns stage 

In the first stage, the AP, MP and TP increase due to the following reasons::



1. The fixed factor is indivisible and every increase in variable factor leads to better and better utilisation of the fixed factor. This increase in the efficiency of fixed factors causes increasing returns,



2. Due to an increase in employment of the variable factor, the efficiency of the variable factor also increases due to the possibility of division of labour and specialisation.

Stage ii : Stage of Diminishing returns reasons for diminishing returns: 

1. During the first stage, till the optimum output is reached, the fixed factor is under utilised. AP increases as long as the fixed factor gets to the point of optimum utilisation. After this, any more increase in the variable factor will make the fixed factor inadequate in relation to the variable factor and the AP will fall.



2. The two factors are not substitutable. If the variable factor could substitute for the fixed factor, the fixed factor would not become inadequate because the variable factor would stand in for the scarce fixed factor.

Stage III: Stage of Negative returns Reasons for the negative returns 

1. Due to continuous increase in the variable factor, we reach the point when units of variable factor become too much for the fixed factor to cope with. It becomes over utilised.



2. This increase in variable factor puts a strain on the fixed factor and it’s efficiency decreases. Moreover, the variable factor now has less and less room and space to work with the this results in the reduction in efficiency of variable factor also.

Revenue Revenue is nothing but sales receipts. It is not the same thing as profits. It is the amount of money you receive by selling the product. For example: If the cost of producing a product = Rs.100/- (total cost TC)  It is sold at Rs.120/- ( total revenue TR)  Profit is TR – TC = Rs.20/

We will study revenue in 2 different markets  1) A perfect market: A market where the producer is not allowed to change the price to sell  2) An imperfect market: A market where the producer is allowed to change the price to sell more 

The concept of revenue : Total, Average and Marginal revenue 

The term ‘revenue’ refers to the receipts of the firm from the sale of certain quantities of a commodity at various prices.



Total revenue (TR) : is calculated by multiplying the total output sold by the price at which the product is sold.



Total revenue = price x output sold



Total revenue (TR) is the total sale proceeds of a firm by selling a commodity at a given price.

Average revenue

 Average

revenue (AR) is the revenue per unit of the commodity sold. It is found by dividing the total revenue by the number of units sold.

total revenue  Average revenue (AR) : -------------------------------= price 



Total sales/ output sold

Marginal revenue (MR)



Marginal revenue (MR) : is the addition to total revenue by sale of an additional unit of the product



Marginal revenue of last( n th) unit sold = total revenue from sale of n units – total revenue from sale of n – 1 unit



change in TR



Or, MR = --------------------------------------



Change in sales/output sold

Revenue curves in perfect competition 

An individual firm has no control on price fixing. It has to sell the product at given price, determined by demand and supply. Hence, price will be equal to AR and MR.



Price

supply

TR

AR

MR



10

1

10

10

----



10

2

20

10

10 Price = AR = MR



10

3

30

10

10



10

4

40

10

10



10

5

50

10

10

Revenue curves in imperfect competition 

Under imperfect competition, a firm can sell more by reducing price.



Units sold

TR

AR

MR



1

50

50

50



2

90

45

40



3

120

40

30



4

140

35

20



5

150

30

10

MR, MC and profit maximisation 

To maximise profits, a producer will produce that level of output which gives him maximum profits. Such a level of profits is given by the equality of MR = MC. Profits will be highest at that level of output at which MR and MC are equal.



Total profit is the difference between TR and TC. Increasing profits will motivate the producer to produce and sell more. Profits will reach the maximum and start declining from the point where MR = MC

Profit maximisation condition Output

TR

AR

MR

TC

AC

MC

TP

1

50

50

50

20

20

20

30

2

90

45

40

30

15

10

60

3

120

40

30

42

14

12

78

4

140

35

20

62

15.5

20

78

5

150

30

10

100

20

38

50

Returns to scale, or production function with all variable inputs ( LR production fn)  When

all factors of production are increased together to the same extent, the MP or returns increase at first, then stays constant and ultimately starts declining if the scale of production is increased still further.

 This  Just

is true of agriculture as well as industry.

as in case of law of variable proportions, we get all 3 phases through which returns pass....