Economics Basics: Markets, Revenue, and Costs

The Law of Variable Proportions

The law of variable proportions states that as the quantity of one factor is increased, keeping the other factors fixed, the marginal product of that factor will eventually decline. This means that up to the use of a certain amount of variable factor, the marginal product of the factor may increase and after a certain stage, it starts diminishing. When the variable factor becomes relatively abundant, the marginal product may become negative.

Perfect Competition

Perfect competition is a market structure where a large number of buyers and sellers are present, and all are engaged in the buying and selling of homogeneous products at a single price prevailing in the market.

In other words, perfect competition, also referred to as pure competition, exists when there is no direct competition between the rivals and all sell identically the same products at a single price.

Features of Perfect Competition

• Large number of buyers and sellers
• Homogeneous Product
• Free Entry and Exit
• Perfect knowledge of prices and technology

Total Revenue

Total revenue is the total receipts a seller can obtain from selling goods or services to buyers. It can be written as P × Q, which is the price of the goods multiplied by the quantity of the sold goods.

Isocost Line

An isocost line is a graphical representation of various combinations of two factors (labor and capital) which the firm can afford or purchase with a given amount of money or total outlay. It is an important tool for determining what combination of factor-inputs the firm will choose for the production process.

Monopolistic Competition

Definition: Monopolistic competition is a market structure that combines elements of monopoly and competitive markets. Essentially, a monopolistic competitive market is one with freedom of entry and exit, but firms can differentiate their products. Therefore, they have an inelastic demand curve and so they can set prices. However, because there is freedom of entry, supernormal profits will encourage more firms to enter the market, leading to normal profits in the long term.

Features of Monopolistic Competition

• Many firms
• Freedom of entry and exit
• Firms produce differentiated products
• Firms have price inelastic demand
• Firms make normal profits in the long run but could make supernormal profits in the short term
• Firms are allocatively and productively inefficient

Oligopoly Market

An oligopoly market is characterized by few sellers, selling homogeneous or differentiated products. In other words, the Oligopoly market structure lies between pure monopoly and monopolistic competition, where few sellers dominate the market and have control over the price of the product.

Features of Oligopoly

• Few sellers
• Interdependency
• Lack of uniformity
• Exit barriers