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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

What is the difference between inferior goods and complementary goods
Bernard Reply
inferior goods are goods whose demand reduces as consumers income increases
rivan
while complementary goods are goods which are jointly demand
rivan
Wow thanks
Bernard
you are welcome
rivan
define the term derived demand
rivan Reply
The Market equilibrium quantity is___ tons of bolts, the socailly optimal quantity of bolt production is ____ tons
Jackie Reply
please what are the key principles of Economics?
Amoako
how to learn about stock exchange market?
jason Reply
how to get to clearly know about BSE and NSE
jason
hiii
santosh
hii
Leela
hlo
Peter
i wanna know about ppf
Peter
Me too
Teremi
Search in web,
Leela
search in website
Leela
Search in web,
Leela
BSE means Bombay stock exchange,and NSE national stock exchange
Leela
What are the uses stastitics in business?
Mohamud Reply
what's scarcity
Brandon Reply
scarcity is the stage at which your end becomes greater than your want.
Caasianebok
what is marginal rate of transformation
Peter Reply
difference between individual demand and market demand with illustrations.
kwagala Reply
what is market demand
kwagala
Is the total amount of goods and services that all consumers are willing and able to purchase...
Istar
market demad business
zahid
What is the different between demand and supply?
Mohamud Reply
Demand is a natural phenomenon by a person who wants a certain commodity , u can say The ablity to buy a certain commodity at a certain price is called demand
Wardan
supply is point of view from Supplier of certain commodity
Wardan
Thnks wardan sheikh
Mohamud
u can get help from Law of Demand which is When a price of certain commodity increases it's quantity demanded decreases and when the price of certain commodity decreases it's quantity demanded increases and vice versa
Wardan
and to understand supply u can understand by the help of law of supply which is when a price of certain commodity increases it's quantity supplies also increases and when price of certain commodity decreases it's quantity supplies also decreases and vice versa
Wardan
Hope u got the answer
Wardan
hi
Christian
hello
Victory
what is point?
Asmatullah
pls it's quantity supplied not quantity supplies. tanx
PETER
Peter it's just typing error if u know better u should take initiatives and start helping people or u can just shut up
Wardan
What is the labour market?
Ruchi
Ruchi Shukla it's a big topic which contains several parts , u can understand a market where there are number of employees (skilled and semiskilled )
Wardan
describe the economic systems
kivumbi
ryt nice
Destiny
what is the cause of a country's population
Destiny
Destiny Abekah the cause Is fun ahahahaha
Wardan
Hi
Crahmaan
What is going here?
Crahmaan
Hi
Jacob
what is naxion shoks any 1 can explain please
Iftikhar
hello
Hydrammeh
impact of transport and communication for economic help me
Jacob
What is the formula for calculating elasticity
Destiny Reply
Change in Quantity/Change in price
Abdul
ok
Destiny
E=%∆ in Q/ %∆ in P
ashafa
what mean elasticity
Jimcaale
change in quantity divided by change in price
mukhtaar
ok
Abdul
price elasticity = Q2-Q1/Q2+Q1/2/ P2-P1/P2+P1/2
Wardan
second formula is change in q / change in p × Q(original)/ p (original)
Wardan
Elasticity is just a measurement of change influenced by change in price , income
Wardan
change quantity /change in price
Ayaan
ok
Muhammad
change in price change in quality
Muhammad
yes
Thomas
public economy vs public choice
martha Reply
cool n you
Godwin
nice
Saratu
thank God
Destiny
so wat is going on
Destiny
please understand change in demand.
Saratu
learning is going on please.
Saratu
demand changes when the price of the commodies in the market increaaes
Destiny
amd vise veser
Destiny
thank you.
Saratu
same to u
Destiny
I need help with PED and PES
XORO Reply
Price elasticity demand
Saratu
price elasticity supply
Saratu
What are the uses of stastitics in economic and business?
Mohamud Reply
Statistics helps in analysing various economic problems such as inflation, unemployment etc by looking at numbers, trends over the years.
Samuel
it also helps in summarising mass data like income, consumption etc into measures like per capita income and per capita consumptions which are more explanatory of how an economy is performing.
Samuel
Statistics is a data interpretation tool used for collecting, classifying and analyzing data. It is an indispensable tool for an economist to understand various business and economic problems and formulate policies to tackle with them.
Samuel
good answer
Destiny
how is the firm know elasticity
Shekwonudiza Reply
What is margin?
Crahmaan
wanna know about GDP ?
Wardan Reply
yes
Leela
i would like to know about GST rather
JNUI
i've gone through many articles related to GST. but my question is, earlier, when the amount of tax was so higher, who was the winner?
JNUI
and if the amount of tax is less, then somebody must be losing some money. so who is the loss maker
JNUI
also, what I don't understand properly is the 'input tax credit'. 🤔 and the e-way bill
JNUI
Gst is an essential Tax to boost up National income
Wardan
Gst isn't ever goes too high but in cases where there is a larger expectations on Sales revenue the gst increase and vice versa
Wardan
and yes it's the only time to make revenue for Central Government under some period and certain conditions u will learn
Wardan
yeah third one the Gst is low
Wardan
the central Government is responsible for such error to not be so prudent under those policies which are applied
Wardan
deductive and inductive
Mianosama
deductive and inductive are the parts of micro economics
Wardan
What are the key elements to consider when defining economics
Samuel
scarcity, means and end
Balogun
Samuel it is defined as study of house hold Management and money matters .
Wardan
scarcity is defined as the point where demand is greater than supply
Wardan
Use scarcity,means and end in your definition
Samuel
I really love this group
Samuel
Am new to economics and you guys are making it so interesting to study
Samuel
yup seems very interesting
Criminologist
Hahaha thanks buddy
Wardan
consider a market (where there are buyers and sellers ) situation , Let's make it funny to make u understand more easy that due to some political issues It is announced by the government that every store will be closed tomorrow , the citizens who are intelligent enough to predict consequences for it
Wardan
They will start buying more and more and due to those political issue some stores were closed and few were opened so at this point the demand for product or commodity (which people are willing to buy from stores) is greater than supply
Wardan
What is GDP
XORO

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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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