Theory of Market Behaviour

Market
FEATURES

● Buyers and Sellers.

● Area.
● One commodity.
● One Price.
● The relationship between
Buyers and Sellers.
Place where commodities
● Perfect Knowledge of the are bought and sold
Market.
● Sound Monetary System,
and.
 Firm
(Motive)
A firm produces and
sells in the market

Two market forms

(On basis of competition)
● Perfect
● Imperfect
Profit maximising
 Features of Perfect Competition

1. The market consists of a large number

of buyers and sellers

2. Each firm produces and sells a

homogenous product
 Features of Perfect Competition

3. Entry into the market and exit from the

market are free

4. Information is perfect
Price Takers
MR4 = TR 4 - TR 4-1
1 12 12 12
0 = TR4 - TR 3
0 = TR4 - 24 2 10 20 20 -12 =8
24 = TR 4 3 8 24 24 - 20 = 4

4 6 24 0
 Profit is the difference
between total REVENUE
earned and total COST
Profit Maximisation incurred of a firm

π = TR - TC
A firm wishes to MAXIMIZE profit

( The firm would like to identify the quantity at which its profit are maximum)
 1
Pr
ic
em
us
tb
ee
qu
al
to
M

2
C
M (M
C R
m =M
us C
tb )
en
on
-d
ec
re
a
3
sin
g
SR (in
-P cr
ea
≥A sin
V g)
C
an
d
LR
-P
≥A
C
Conditions for profit to be maximum
 Condition 1 : MR = MC

Change in total
MR revenue per unit
increase in output π = TR - TC
TR > TC
(more profit)
Change in total
MC
cost per unit
increase in output
MR > MC, profit will rise Profit to be maximum
MR < MC, profit will fall MR = MC
Condition 3 : LR - P ≥ AC