Economics and Market Competition
Companies influence and are influenced by market conditions. The competitiveness on the market, the supply and demand determine how companies develop their strategies. There are also other factors that determine their strategy, like market price, average revenue, and marginal revenue. The evolution of these factors and their influence on the market determine companies’ behavior.
Market Price, Average Revenue, and Marginal Revenue
The market price is determined by supply and demand. When the supply of a certain product is high, its price is lower, and when the supply is low, this increases the product’s price. In markets with high levels of supply there is . When the demand for a certain product is high, the price tends to increase. In markets with reduced demand, the prices are lower, and the level of competition is reduced.
Marginal revenue is represented by the extra revenue gained when a perfectly competitive company sells one more unit of output. This is an important factor that is analyzed in relationship with marginal cost in situations where make decisions about increasing their profits (Hubbard & O’Brien, 2009). Companies’ market control abilities are reflected by the marginal revenue. If marginal revenue is constant, it means the company can control the market in case. The profits can be increased by equating marginal revenue, which is the extra revenue determined by production, with marginal cost, which is the extra cost of production. In situations where marginal revenue and marginal cost are not equal, profits can be increased by increasing or reducing production.
Average revenue is the revenue received from selling a unit of a product. Basically, the average revenue is represented by the price at which the company sells its product. The average revenue allows to analyze its relationship with total revenue and production capacity.
In the case of perfectly competitive companies, marginal revenue is equal to price and average revenue. This means that these three factors are constant. In the case of monopolies or oligopolies, the marginal revenue is lower in comparison with price and average revenue. In such cases, these factors reduce if the company increases its production.
In the case of , marginal revenues, average revenue, and price are equal and constant. However, perfect markets with high numbers of small companies that , and have no control over prices and the market in case, exist only in theory. It is important to understand the influence of marginal revenue, average revenue, and price on productivity.
1. Hubbard, R. & O’Brien, A. (2009). Essentials of Economics. . Retrieved August 15, 2013.