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By the end of this section, you will be able to:
  • Calculate profits by comparing total revenue and total cost
  • Identify profits and losses with the average cost curve
  • Explain the shutdown point
  • Determine the price at which a firm should continue producing in the short run

A perfectly competitive firm has only one major decision to make—namely, what quantity to produce. To understand why this is so, consider a different way of writing out the basic definition of profit :

Profit = Total revenue Total cost           = ( Price ) ( Quantity produced ) ( Average cost ) ( Quantity produced )

Since a perfectly competitive firm must accept the price for its output as determined by the product’s market demand and supply, it cannot choose the price it charges. This is already determined in the profit equation, and so the perfectly competitive firm can sell any number of units at exactly the same price. It implies that the firm faces a perfectly elastic demand curve for its product: buyers are willing to buy any number of units of output from the firm at the market price. When the perfectly competitive firm chooses what quantity to produce, then this quantity—along with the prices prevailing in the market for output and inputs—will determine the firm’s total revenue, total costs, and ultimately, level of profits.

Determining the highest profit by comparing total revenue and total cost

A perfectly competitive firm can sell as large a quantity as it wishes, as long as it accepts the prevailing market price. Total revenue is going to increase as the firm sells more, depending on the price of the product and the number of units sold. If you increase the number of units sold at a given price, then total revenue will increase. If the price of the product increases for every unit sold, then total revenue also increases. As an example of how a perfectly competitive firm decides what quantity to produce, consider the case of a small farmer who produces raspberries and sells them frozen for $4 per pack. Sales of one pack of raspberries will bring in $4, two packs will be $8, three packs will be $12, and so on. If, for example, the price of frozen raspberries doubles to $8 per pack, then sales of one pack of raspberries will be $8, two packs will be $16, three packs will be $24, and so on.

Total revenue and total costs for the raspberry farm, broken down into fixed and variable costs, are shown in [link] and also appear in [link] . The horizontal axis shows the quantity of frozen raspberries produced in packs; the vertical axis shows both total revenue and total costs, measured in dollars. The total cost curve intersects with the vertical axis at a value that shows the level of fixed costs, and then slopes upward. All these cost curves follow the same characteristics as the curves covered in the Cost and Industry Structure chapter.

Total cost and total revenue at the raspberry farm

The graph shows that firms will incur a loss if the total cost is higher than the total revenue.
Total revenue for a perfectly competitive firm is a straight line sloping up. The slope is equal to the price of the good. Total cost also slopes up, but with some curvature. At higher levels of output, total cost begins to slope upward more steeply because of diminishing marginal returns. The maximum profit will occur at the quantity where the gap of total revenue over total cost is largest.

Questions & Answers

elasticity and applications
sabir Reply
hi
Nana
hello po
Ranjet
yh
Nana
pls am called Nana Adjei
Nana
😄😄
Vivek
pls I think I can join your conversation
Nana
whats the prblm now
Vivek
what is agricultural economics
Faraja Reply
what are the determinant of economics growth
Zuberi Reply
hey guys son marketing notice
Jude Reply
what?
Jale
what do u mean jale?
tesfie
what do you mean by what?
tesfie
😂😂
Caasianebok
😂😂
Caasianebok
meaning of Money, worth and wealth, economic goods and service
Mariana Reply
money is just means of exchange denomination of wealth while wealth is the sum total of all assets held in either liquid or non liquid form, where as worth is the exchange value of an asset.
tesfie
hi
Hamdiya
why do we study economics
Hamdiya
We also studied economics in order to know about the human behaviour or phycology towards there needs
sarmad
we study Economics to adjust unlimited human needs with the limited natural resources of the earth in order to achieve susyainabl economic development.
tesfie
hi guys.....pls help me out, am confused.. should i go for accounting/accountancy or I should go for business administration?.
Isabella
bussiness
Zuberi
what is equilibrium
Daniel Reply
it is intersect point of economics line in graph, but everytime not graph
Ahmet
it is the intersection point of supply and demand curves
tesfie
GDP is domestic gross product. refer my site amanchabukswar.wordpress.com
Aman Reply
Hi everyone
AWOYEMI
hello lovely where am I?
Becky
Good morning
AWOYEMI
morning
Daniel
hi dear bro
tesfie
why does a firm continue operating at a breakeven point
Prince Reply
to retain its customers for later coming profits.
tesfie
this is because the firm's revenu is covering the variable cost so the firm should continuos business
Florencia
and zero profit is a normal profit which covers entrepreneur's profit along with recovering wages, interest and rent.
Farooq
what economic trend can we expect after lifting of 10 year long sanctions in an national economy?
tesfie Reply
difference between change in demand and change in quantity demanded
Maurice Reply
how
kumar
how to change
kumar
For a demand with repect to price. change in demand refers to the shifting of demand curve, where as change in quantity demanded means movement along the given demand curve.
Farooq
According to lional Robbins how did he explain economics
Raphael Reply
He defined economics as a science which studies human behavior as a relationship between ends and scares which has alternative uses.
Emmanuel
What is economics
Nasiru Reply
why are some countries producing inside the ppf
Claire Reply
prove or disprove that balance of trade of trade deficit is a cause of an abnormal demand curve?
Chioma Reply
what's the fixed cost at output zero
Saidou Reply
fixed cost stay the same regardless of the level of output
Luka
example; electricity bill is fixed cost....but when the machinery plant is not active and perhaps so offices are locked up due to unforseen circumstances..... definitely the electric nose dive.... that is a reduction in fixed right? am just saying hope am making a point Luke?
klevic

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Source:  OpenStax, Principles of economics. OpenStax CNX. Sep 19, 2014 Download for free at http://legacy.cnx.org/content/col11613/1.11
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