Shahjalal University of Science & Technology(SUST)

ASSIGNMENT

Course Title: Principles of Economics

Course Code: ECO205D

Date of Submission: 28 February 2025

Submitted to:
Dr. Sadiqunnabi Choudhury
Professor,
Dept. of Economics, SUST

Submitted By: Group 4A

Group Co-Ordinator:
1.​ 2021331001 - Tanvir

Group Members:
2.​ 2021331003 - Arif
3.​ 2021331051 - Nayem
4.​ 2021331091 - Santosh
5.​ 2021331055 - Hashem
6.​ 2021331025 - Rakibul
 4.1: Theory of Profit
4.1.1:The concept of Revenue: TR, AR, and MR

Profit is the financial gain obtained when total revenue exceeds total costs. It is a key
indicator of business success and economic efficiency and is essential for business
growth, investment, and economic development.

Profit , π =Revenue - Cost

↓ ↓
P← Sales of goods Cost of production,
and services TC(Total Cost)
↙ ↘
TFC(Total Fixed cost) (TVC) Total variable cost

In profit analysis, three key types of revenue are considered:

1️. Total Revenue (TR)​

2️. Average Revenue (AR)​
3️. Marginal Revenue (MR)

Total Revenue :

Total Revenue represents the total income a business earns from selling its goods or
services to customers. It reflects the overall financial inflow generated from sales. Total
revenue is calculated as an average sales price per good or unit multiplied by the
number of goods or units that were sold. That is, if a company sells a total of q units of a
good and sells them for a price of p per unit, then the total revenue will be

TR=p×q

Where:

p = Price per unit of the good

q = Quantity of goods sold

Average Revenue:

Average Revenue (AR) is the income earned per unit of a good or service sold. It is
determined by dividing the Total Revenue (TR) by the total quantity of goods sold.

Mathematically,

Average Revenue, 𝐴𝑅 = 𝑇𝑅/𝑞

Where,

q = number of units of a good sold

Marginal Revenue:

Marginal Revenue (MR) refers to the additional revenue a firm earns when it sells
one more unit of a good or service. It represents the change in Total Revenue (TR)
resulting from a one-unit increase in sales.

Marginal Revenue, 𝑀𝑅 = 𝑑𝑇𝑅/𝑑𝑞

TR, MR, and AR Curves

Here, both the AR and MR curves start from the same point. For markets other than a
Perfectly Competitive Market (PCM), there is a relation between the AR and MR curves.
The relationship is:

Slope of MR curve = 2 x Slope of AR curve

In PCM, both the AR and MR curve is the same horizontal line. This can be
graphically represented as-
Relationship Between TR,MR and AR:

q p TR MR AR
1 10 10 - 10
2 9 18 8 9
3 8 24 6 8
4 7 28 4 7
5 6 30 2 6
4 5 20 -10 5
3 4 12 -8 4
When P is fixed:

q p TR

1 10 10
2 10 20
3 10 30
4 10 40
5 10 50
4.1.2 Profit Maximizing Conditions
Profit: Profit is the amount left after covering all expenses, including wages, materials,
debt interest, and taxes. It represents the earnings of a business after paying its costs.
For businesses, profit is the reward for investment. Small business owners receive it as
income, while corporations distribute it as dividends to shareholders.
Profit is obtained using the following formula:

Profit, π=Total Revenue (TR) – Total Cost (TC)

Graphical Analysis:

Profit Curve
Here-
• When the slope of TR and the slope of TC are equal, then the tangential points
provide the maximum level of profit.
• There are two points at which the profit curve cuts the horizontal axis. In those points,
there is neither any profit nor any loss. These points are called ‘Break-Even Points’.
Conditions for Profit Maximization:

First Order Condition(FOC):

𝑑𝑦
For Optimum: 𝑑𝑥
=0
Second Order Condition(SOC):
2
𝑑𝑦
• 2 < 0 For maximum
𝑑𝑥
2
𝑑𝑦
• 2 > 0 For minimum
𝑑𝑥

We know,

Profit, π=Total Revenue (TR) – Total Cost (TC)

Now, by differentiating the profit equation with respect to q (Total number of units of
goods sold), we get,
𝑑π 𝑑𝑇𝑅 𝑑𝑇𝐶
𝑑𝑞
= 𝑑𝑞
− 𝑑𝑞

For maximum value of π

𝑑π
𝑑𝑞
=0
𝑑𝑇𝑅 𝑑𝑇𝐶
Or, 𝑑𝑞 − 𝑑𝑞 = 0
𝑑𝑇𝑅 𝑑𝑇𝐶
Or, MR-MC=0[ 𝑑𝑞 =Marginal Revenue (MR), 𝑑𝑞 =Marginal Cost(MC)]

So, MR=MC

This condition is known as ‘First Order Condition (FOC)’ for profit maximization.

Now, by differentiating the profit equation twice with respect to q, we get,

2 2 2
𝑑π 𝑑 𝑇𝑅 𝑑 𝑇𝐶
2 = 2 − 2
𝑑𝑞 𝑑𝑞 𝑑𝑞

For maximum value of π,

2
𝑑π
2 < 0
𝑑𝑞
2 2
𝑑 𝑇𝑅 𝑑 𝑇𝐶
Or, 2 − 2 < 0
𝑑𝑞 𝑑𝑞
Or, Slope of MR – Slope of MC < 0

so,Slope of MR < Slope of MC

This condition is known as ‘Second Order Condition (SOC)’ for profit maximization.
Graphical Analysis:

At point P, MR is equal to MC, which satisfies the FOC. Also, at point P, slope of MR is
less than slope of MC, hence satisfying the SOC. So, P is the point at which profit is
maximum.

4.2 Types of Market

Characteristics:

#Bayers #Quality of product

#Sellers #Control over price
#Market dynamics
Entry Barrier
 Source:[Link]

Three types of market:

1. Perfectly Competitive Market (PCM)

2. Monopoly
3 . Monopolistic Competition
Type of No. of No. of Quality of Control
Market Seller Buyer the Product Over Barrier Shape of the
Prize to Demand Curve
Entry

Perfectly Infinitive Infinitive Identical / No Control None Horizontal

Competitive Sellers Buyers Homogeneous (Price (Free
Market Products Taker) Entry
and Exit)

Monopoly One Many Product with Full No Downward

Seller Buyers No Close Control Entry, Slopping
Substitute (Price No Exit
Maker)

Monopolistic Many Quite Perceived or Some None Downward

Competitive Sellers Many Real Control (Free Slopping
Market Buyers Product Entry
Difference and Exit)
 4.3 Perfectly Competitive Market (PCM)

4.3.1 Perfect Competition

Properties of a Perfectly Competitive Market (PCM):

1. Number of buyers & sellers: There are many sellers and many buyers, none of
which is large in relation to total sales or purchases. This assumption speaks to both
demand (the number of buyers) and supply (the number of sellers). Because there are
many buyers and sellers, each buyer and each seller may act independently of other
buyers and sellers, respectively, and each is such a small part of the market that it has
no influence on price.

2. Degree of product differentiation: Each firm produces and sells an

identical/homogeneous product. Each firm sells a product that is indistinguishable from
all other firms’ products in a given industry. Consequently, buyers are indifferent to the
sellers.

3. Control over price: There is no control over price. Many firms are competing in the
market. A single firm cannot influence the total market output and/or price. So, the firm
is a price-taker.

4. Entry barrier: Firms have free entry and exit. New firms can enter the market easily,
and existing firms can exit the market easily. There are no barriers to entry or exit.

5. Shape of the demand curve: The Demand curve under PCM is horizontal.
4.3.2 Profit Maximization under PCM

Profit maximization for all kinds of market:

Economists assume that a firm’s objective in producing and selling goods is to maximize
profit. Profit is the difference between total revenue and total cost.

This is called the First Order Condition for profit maximization.

Profit maximization under PCM:

1. Super normal Profit:

When p>AC, the firm earns a profit. The profit curve is shown below.

Profit, 𝜋 = 𝑇𝑅 −𝑇𝐶

So, from the graph

TR=p*×q* & TC = AC×q*

Π = Oq*× Ap* - Oq*× BC

= ABCp*

So, Super Normal profit = Area of ABCp* For this super normal profit, other firms want
to enter the market and super normal profit disappears

.
2. Loss:
When p>AC, the firm earns a profit. The curve concerning loss is shown below.

Profit, Π = Oq*AP – Oq*BC

Here, Oq*BC > Oq*AC

So, Π is negative, and the firm faces loss

Because of Loss, some existing firms will quit the market.

3. Profit in the long run

In the long run, economic profit must be zero, which is also known as normal profit.
Economic profit is zero in the long run because of the entry of new firms, which drives
down the market price.

Profit, = Oq*AP - Oq*BC

As, Oq*AP = Oq*BC

So, Profit =0

This profit is called normal profit.

1 & 2 is profit in the short run. 3 is the

profit for the long run
 4.4 Monopoly Market

Definition: A monopoly market is a market structure where a single seller or producer

dominates the entire market, with no close substitutes for the product or service offered.

Source: internet

Description: Monopolies arise due to various barriers to entry that prevent other firms
from entering the market. These barriers may include government licenses,
ownership of key resources, patents, copyrights, and high startup costs. Such
factors limit competition, ensuring that the monopolist remains the sole provider of
the good or service.

Additionally, monopolists often have exclusive market knowledge or technology that

is unavailable to other businesses. This further strengthens their position, making it
difficult for new firms to compete. Because they are the only supplier, monopolists
have the power to set prices according to their profit goals rather than following
market-determined pricing.
4.4.1 Basic Characteristics of Monopoly:

1. Single Seller

In a monopoly, only one firm produces and supplies a particular good or service.

2. No Close Substitutes

The monopolist’s product is unique and has no close alternatives.

3. High Barriers to Entry

New firms cannot easily enter the market due to obstacles such as:

Legal Barriers (patents, government regulations, exclusive rights)

High Startup Costs (large capital investment required)

Technological Superiority(the monopolist owns specialized technology)

Control of Key Resources (ownership of raw materials, infrastructure, or distribution

channels)

4. Price Maker (Price-Setting Power)

Since there are no competitors, the monopolist has control over the price.

5. Restricted Consumer Choice

Consumers are limited to purchasing only from the monopolist or going without the
product
 Source: internet

Barriers to Entry in a Monopoly Market:

Barriers to entry in a monopoly market prevent new firms from entering and competing
with the monopolist. These barriers ensure that the monopolist remains the sole
provider of a product or service. Below is a detailed list of the key barriers to entry in a
monopoly market:

1. Legal Barriers

These are government-imposed restrictions that prevent new firms from entering the
market.

a. Patents
 ​ A patent grants a firm exclusive rights to produce and sell a product for a specific
period (usually 20 years).
​

b. Licenses and Permits

​ Governments may require special licenses to operate in certain industries.

​ These licenses limit the number of firms allowed to operate.
​

2. High Startup and Sunk Costs

Entering certain industries requires huge initial investments, making it difficult for new
firms to compete.

a. Capital-Intensive Industries

​ Some businesses require enormous financial investments in factories,

machinery, or infrastructure.
​

b. Sunk Costs

​ Sunk costs are costs that cannot be recovered once spent (e.g., advertising,
R&D).
​ High sunk costs discourage new firms because they risk losing money if they fail.
​

3. Economies of Scale

A monopolist benefits from economies of scale, meaning it can produce at a lower

cost per unit due to large-scale production. New firms, producing on a smaller scale,
cannot compete on cost.

a. Cost Advantages of Large-Scale Production

​ The monopolist spreads fixed costs (like R&D, marketing) over a large number of
units, reducing per-unit costs.
​

b. Natural Monopoly
 ​ A natural monopoly exists when one firm can serve the entire market more
efficiently than multiple firms.
​

4. Control Over Key Resources

A monopolist may own or control essential raw materials or inputs required for
production. New firms cannot compete without access to these resources.

5. Technological Superiority

Some firms maintain a monopoly due to advanced technology that competitors cannot
easily replicate.

​ A firm with proprietary technology (trade secrets, exclusive production

methods) can prevent others from entering the market.

Real World Examples of Monopoly Market:

Here are some real-world examples of monopolies across different industries:

1. Google – Search Engine Monopoly

​ Industry: Online Search

​ Monopoly Type: Technological and Network Effects
​ Details:
​ Google dominates the search engine market with over 90% global market
share.
​ Competitors like Bing and Yahoo exist but have minimal market presence.
​ Google's algorithms, vast data collection, and ad-driven business model
create high entry barriers.

2. Microsoft – Windows Operating System

​ Industry: Operating Systems

​ Monopoly Type: Technological Superiority and Network Effects
 ​ Details:
​ Microsoft Windows is the dominant OS for PCs, with a significant global
market share.
​ Most businesses and consumers use Windows, creating a strong network
effect.
​ Competing OS options like Linux and macOS exist, but Windows remains
the default choice due to software compatibility and user familiarity.

3. Amazon Web Services (AWS) – Cloud Computing

​ Industry: Cloud Computing

​ Monopoly Type: Economies of Scale and Technological Superiority
​ Details:
​ AWS is the largest cloud service provider, controlling a significant share of
the market.
​ Its extensive global infrastructure makes it difficult for smaller cloud
providers to compete.
​ AWS benefits from economies of scale, allowing it to offer lower prices
and better services.

4. De Beers – Diamond Industry

​ Industry: Diamond Mining and Distribution

​ Monopoly Type: Control Over Key Resources
​ Details:
​ De Beers once controlled around 80-90% of the global diamond supply.
​ It maintained a monopoly by stockpiling diamonds to control prices.
​ Although its dominance has weakened, it still plays a major role in the
diamond industry.

5. Utility Companies (Electricity, Water, Gas)

​ Industry: Public Utilities

​ Monopoly Type: Natural Monopoly and Government Regulation
​ Details:
​ Many countries have government-regulated monopolies for utilities
(electricity, water, and gas).
​ It would be inefficient to have multiple companies laying infrastructure
(e.g., power lines or water pipes).
​ Governments regulate prices to prevent exploitation.
​
​
Demand and Marginal Revenues:

In a monopoly market, the demand curve and marginal revenue curve (MR curve)
behave differently compared to a perfectly competitive market. Below is a detailed
explanation of both:

1. Demand Curve in a Monopoly

The demand curve in a monopoly represents the relationship between the price of a
product and the quantity demanded by consumers.

Characteristics of the Demand Curve in a Monopoly:

​ Downward Sloping: Unlike in perfect competition (where firms are price takers),
a monopolist faces a downward-sloping demand curve. This means:
​ To sell more, the monopolist must lower the price.
​ If the monopolist raises the price, the quantity demanded decreases.
​ Price Maker: The monopolist has control over the price because there are no
close substitutes.
​ Represents the Market Demand: Since the monopolist is the sole seller, its
demand curve is the entire market demand curve.

2. Marginal Revenue (MR) Curve in a Monopoly

Marginal Revenue (MR) is the additional revenue a firm earns from selling one more
unit of its product.

Characteristics of the Marginal Revenue Curve in a Monopoly:

​ Lies Below the Demand Curve:

​ Since the monopolist must lower the price to sell more, marginal revenue
is always less than the price.
​ This means the MR curve is always below the demand curve.
​ Declining Marginal Revenue:
​ When a monopolist sells more, it earns less revenue per additional unit
because the price must be lowered for all units sold.
​ This leads to a falling MR curve.
 ​ MR Can Be Negative:
​ If the price is lowered too much, the revenue from additional sales might
not compensate for the loss in revenue from previously sold units.

3. Relationship Between Demand and Marginal Revenue Curves

​ The MR curve is always below the demand curve because, for a monopolist,
MR < Price (P) at all output levels.
​ The MR curve starts at the same price as the demand curve but declines twice
as steeply.
​ MR becomes negative when total revenue starts decreasing.

4. Graphical Representation

If we plot the demand curve and MR curve, the MR curve is always below the demand
curve and falls faster.

Key Points on the Graph:

​ The demand curve slopes downward.

​ The MR curve starts at the same point but declines more steeply.
​ The MR curve crosses the horizontal axis at the output level where total revenue
is maximized.
​ After this point, MR becomes negative.
The graph explains the relationship between price (P), total revenue (TR), and marginal
revenue (MR) in a monopoly.

1. Price Function (Inverse Demand Function):

P = a−bQ

This represents a linear demand curve, where:

​ P = Price
​ Q = Quantity demanded
​ a = Maximum price (intercept on the price axis)
​ b = Slope of the demand curve (shows how price decreases as quantity
increases)

Since monopolists face the market demand directly, they must reduce the price to sell
more, which is why the price depends on quantity.

2. Total Revenue (TR):

TR = P×Q

Substituting P from the first equation:

TR = (a−bQ)×Q

Expanding:

TR=aQ−bQ2

​ TR increases initially as output increases, but at a diminishing rate due to the

downward-sloping demand curve.
​ Eventually, TR starts decreasing when the price drops too much, leading to
negative marginal revenue.

3. Marginal Revenue (MR):

​ This shows that MR decreases twice as fast as price.

​ The MR curve is steeper than the demand curve and always lies below it.

The slope of MR is Double the Slope of the Demand Curve.

​ The demand curve has a slope of −b, while the MR curve has a slope of
-[Link] that
 ​ This means the MR curve bisects the horizontal axis at half the quantity
where the demand curve does.

Interpretation in a Monopoly:

​ A monopolist will only produce where MR is positive (before total revenue

starts decreasing).
​ The profit-maximizing output is where MR = MC (Marginal Cost).

4.4.2 Profit Maximization in Monopoly Market :

The monopolist's goal is to maximize profit by choosing an optimal level of output and
price. This is achieved where:

Marginal Revenue (MR) = Marginal Cost(MC)

This is known as the profit maximization condition because:

​ If MR > MC, producing more units increases profit.

​ If MR < MC, producing more units decreases profit.
​ If MR = MC, the firm has maximized its profit.
 Fig: Graph for Profit Maximization under Monopoly

The following equations describe the monopolist's total revenue, total cost, and profit:

​ Total Revenue (TR):

TR = oq* X Ap*

oq* represents the optimal quantity produced.

Ap* is the price corresponding to q* from the demand curve.

2. Total Cost (TC):

TC = oq*.X BC
 ​ BC is the cost per unit at the optimal quantity q∗.

3. Profit (π):

Π = TR−TC

Substituting the values:

Π = (oq* X Ap*)−(oq∗ X BC)

Simplifying:

Π = ABCp∗

This equation means that the total profit is represented by the rectangular area
ABCp* in the graph.

4.5 Monopolistic Competition

Monopolistic competition is a market structure characterized by a large number of
firms selling differentiated products, with free entry and exit, and some degree of price
control due to product differentiation.

4.5.1 Characteristics Of Monopolistic Competition:

Key Characteristics:
[Link] Sellers
[Link] Differentiation
[Link] Entry and Exit
[Link] Control
[Link] is Highly Elastic

1. Many Sellers:

​ Unlike a monopoly, where a single firm dominates, monopolistic

competition involves many firms.
​ Each firm has a small market share and cannot dictate market
conditions.
​ The presence of many competitors ensures that no single firm can
control the entire market.

[Link] Differentiation:
A key feature of monopolistic competition is that firms sell products that are
similar but not identical.
Product differentiation can be based on:

​ Physical Differences: Variations in quality, design, or features (e.g.,

different brands of smartphones).
​ Branding and Reputation: Some companies create strong brand
identities (e.g., Nike vs. Adidas).
​ Customer Service: Firms compete by offering better service, return
policies, or warranties.

3. Free Entry and Exit

​ New firms can enter the market if they see profit opportunities, and
existing firms can leave if they are making losses.
​ However, there may be some barriers to entry, such as high
advertising costs or customer loyalty to existing brands.
​ Over time, entry and exit of firms lead to normal profits in the long
run
[Link] Control:

​ Since products are differentiated, firms have some control over their
pricing.
​ Unlike perfect competition, where firms are price takers, firms in
monopolistic competition can set prices within a limited range.
​ However, demand is elastic, meaning that if a firm sets prices too
high, customers can switch to alternatives.

5. Demand is Highly Elastic

​ Consumers have many alternatives, so demand for any single firm's

product is elastic (responsive to price changes).
​ If a firm increases prices significantly, customers will switch to
competitors.
​ However, strong branding and differentiation can make demand
less elastic

4.5.2 Profit Maximization in Monopolistic Competitive Market​

​
In monopolistic competition, firms maximize profit by producing at the
quantity where marginal cost (MC) equals marginal revenue (MR).

The market demand curve and firm demand curve in monopoly is

downward sloping.
MR = MC
Slope of MR > Slope of MC

Condition for marginal revenue :-

1. MR should start to the origin AR
2. It crosses the horizontal exists through the midpoint of AR

All firms maximize profits when their marginal cost is equal to the marginal
product.
Monopolistic competition in short run equilibrium:-

Monopolistic profit:

Profit, π = TR – TC
= p*.q - AC.q
​ ​ = ( OP × Oq ) - ( OC × Oq* )
​ ​ = ( Oq × AP ) - ( Oq × BC )
​​ = PABC
Monopolistic Loss:
Loss = TR – TC
= AC.q -p*.q
= ( Oc × Oq* ) - ( OP × Oq )
= ( Oq × BC ) - ( Oq × AP )
= PABC

Monopolistic competition in long run equilibrium:-

π = TR – TC
= p.q – AC.q =
OPOq* - OPOq*
= 0 (Normal profit)
References:
1. Economics, Ninth Edition, E, Roger A. Arnold
[Link], Nineteenth Edition PAULA. SAMUELSON & WILLIAM D. NORDHAUS
3. Lumen Learning. (n.d.). Profit Maximization in a Perfectly Competitive Market. Retrieved from
[Link]
y-competitive-market/
4. Economics Online. (n.d.). Graph of Perfect Competition. Retrieved from
[Link]
[Link]. (n.d.). Profit Maximization in Perfect Competition Market. Retrieved from
[Link]
6. Perfect Competition Graphs: Meaning, Theory, Example. Retrieved from
[Link]
n-graphs

THE END