# 8.2 How perfectly competitive firms make output decisions  (Page 10/28)

 Page 10 / 28
Q P TFC TVC TC AVC ATC MC TR Profits
0 \$28 \$20 \$0 \$20 - - - \$0 −\$20
1 \$28 \$20 \$20 \$40 \$20.00 \$40.00 \$20 \$28 −\$12
2 \$28 \$20 \$25 \$45 \$12.50 \$22.50 \$5 \$56 \$11
3 \$28 \$20 \$35 \$55 \$11.67 \$18.33 \$10 \$84 \$29
4 \$28 \$20 \$52 \$72 \$13.00 \$18.00 \$17 \$112 \$40
5 \$28 \$20 \$80 \$100 \$16.40 \$20.40 \$30 \$140 \$40

Step 5. Once you have determined the profit-maximizing output level (in this case, output quantity 5), you can look at the amount of profits made (in this case, \$40).

Step 6. If the firm is making economic losses, the firm needs to determine whether it produces the output level where price equals marginal revenue and equals marginal cost or it shuts down and only incurs its fixed costs.

Step 7. For the output level where marginal revenue is equal to marginal cost, check if the market price is greater than the average variable cost of producing that output level.

• If P>AVC but P<ATC, then the firm continues to produce in the short-run, making economic losses.
• If P<AVC, then the firm stops producing and only incurs its fixed costs.

In this example, the price of \$28 is greater than the AVC (\$16.40) of producing 5 units of output, so the firm continues producing.

## Key concepts and summary

As a perfectly competitive firm produces a greater quantity of output, its total revenue steadily increases at a constant rate determined by the given market price. Profits will be highest (or losses will be smallest) at the quantity of output where total revenues exceed total costs by the greatest amount (or where total revenues fall short of total costs by the smallest amount). Alternatively, profits will be highest where marginal revenue, which is price for a perfectly competitive firm, is equal to marginal cost. If the market price faced by a perfectly competitive firm is above average cost at the profit-maximizing quantity of output, then the firm is making profits. If the market price is below average cost at the profit-maximizing quantity of output, then the firm is making losses.

If the market price is equal to average cost at the profit-maximizing level of output, then the firm is making zero profits. The point where the marginal cost curve crosses the average cost curve, at the minimum of the average cost curve, is called the “zero profit point.” If the market price faced by a perfectly competitive firm is below average variable cost at the profit-maximizing quantity of output, then the firm should shut down operations immediately. If the market price faced by a perfectly competitive firm is above average variable cost, but below average cost, then the firm should continue producing in the short run, but exit in the long run. The point where the marginal cost curve crosses the average variable cost curve is called the shutdown point.

## Problems

The AAA Aquarium Co. sells aquariums for \$20 each. Fixed costs of production are \$20. The total variable costs are \$20 for one aquarium, \$25 for two units, \$35 for the three units, \$50 for four units, and \$80 for five units. In the form of a table, calculate total revenue, marginal revenue, total cost, and marginal cost for each output level (one to five units). What is the profit-maximizing quantity of output? On one diagram, sketch the total revenue and total cost curves. On another diagram, sketch the marginal revenue and marginal cost curves.

Perfectly competitive firm Doggies Paradise Inc. sells winter coats for dogs. Dog coats sell for \$72 each. The fixed costs of production are \$100. The total variable costs are \$64 for one unit, \$84 for two units, \$114 for three units, \$184 for four units, and \$270 for five units. In the form of a table, calculate total revenue, marginal revenue, total cost and marginal cost for each output level (one to five units). On one diagram, sketch the total revenue and total cost curves. On another diagram, sketch the marginal revenue and marginal cost curves. What is the profit maximizing quantity?

A computer company produces affordable, easy-to-use home computer systems and has fixed costs of \$250. The marginal cost of producing computers is \$700 for the first computer, \$250 for the second, \$300 for the third, \$350 for the fourth, \$400 for the fifth, \$450 for the sixth, and \$500 for the seventh.

1. Create a table that shows the company’s output, total cost, marginal cost, average cost, variable cost, and average variable cost.
2. At what price is the zero-profit point? At what price is the shutdown point?
3. If the company sells the computers for \$500, is it making a profit or a loss? How big is the profit or loss? Sketch a graph with AC, MC, and AVC curves to illustrate your answer and show the profit or loss.
4. If the firm sells the computers for \$300, is it making a profit or a loss? How big is the profit or loss? Sketch a graph with AC, MC, and AVC curves to illustrate your answer and show the profit or loss.

when give the production of bread and pizza. where by bread produces 10 units and pizza 5 units. how do you calculate for the opportunity cost for bread and pizza
6. The countries of Figistan and Blah are small island countries in the South Pacific. Both produce fruit and timber. Each island has a labor force of 1,200. The following table gives production per month for each worker in each country. a. Which country has an absolute advantage in the product
6. The countries of Figistan and Blah are small island countries in the South Pacific. Both produce fruit and timber. Each island has a labor force of 1,200. The following table gives production per month for each worker in each country. a. Which country has an absolute advantage in the producti
Bablu
Bablu XD
Neil
Buddy
Neil
We need to know the values to help
Neil
BASKETS OF FRUIT BOARD FEET OF TIMBER Figistan workers 10 5 Blah workers 30 10 Productivity of one worker for one month
Bablu
basket of fruit |basket of timber Figistan workers 10 5 Blah workers 30 10
Bablu
a. Which country has an absolute advantage in the production of fruit? Which country has an absolute advantage in the production of timber? b. Which country has a comparative advantage in the produc- tion of fruit? of timber? c. Sketch the ppf’s for both countries. d. Assuming no trading betwe
Bablu
Neil rawat
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Hy neil
shaikh
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bablu
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where the table
Souley
my own idea is that we should divide the number of baskets of fruits and timber by labour force
The
Is it true. can somebody correct me
The
No not true
Neil
Absolute Advantage is determined by the numbers
Neil
You can't just divide it or something
Neil
For example, US makes 8 Cars and 6 Fish Canada makes 2 cars 3 fish US has absolute advantage in this scenario
Neil
Rawat thank you
The
Neil Rawat but a country is said to have absolute advantage over another country when it spends less time producing a commodity
The
For example, 8 cars are produced in one hour. how can we calculate the amount of time for producing one car
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Neil Rawat*
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There are two types of Questions
Neil
Input and Output. The one that you just put and Bablu asked "Produced in one hour" or "in one month" is Input. Time is a resource. If it said this is just how much they produce, then it's output.
Neil
Shaikh, correct me if I'm wrong and Bablu I'll try to do the problem by 7:30 EST
Neil
Dude Bablu I think there's something wrong either with the question or the way you set that problem up
Neil
Cuz both countries can't specialize in both things
Neil
where is the following table?
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Figistan workers 10.........5 Blah Workers 30.............. 10
Neil
i don.t understand plz explain esaily
hello . you mean about assignments help ?
Nhamo
which 1u don't understand
ubong
marginal cost for what
Xasan
definition of economics
Abdal
Marginal cost is the additional increase in quantity produced as a result of increasing total cost
The
MC=dTC/dQ i.e change in total cost as a result of change in quantity produced
The
hello
Soga
hello
Abdal
What happens to the quantity of dollars when the demand for it increases and supply decreases? Does the quantity or volume remain the same?
Anamaya
hello
Bablu
Bablu
yes
Abdal
yes
Soga
price of dollars will increase
Harsh
what are the principles of economics
Economics is a social science that studies how people satisfy unlimited wants with scarce resources. It involves the analysis of choice and trade through the use of intuitive graphs and mathematical elements. The discipline is divided into two sections: microeconomics (micro) and macroeconomics(macr
Zain
micro and macro principles
Souley
I want to know about microeconomics principles
Gajendra
micro study economics partly eg hw mankind's makes decisions
Souley
explain clearly
Gajendra
it focuses on the actions of Individual agent within an economy like households,business etc
Souley
I understand
Gajendra
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Souley
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Paul
hi
Souley
hi
Gajendra
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Souley
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The
Helloooooo
Steven
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Souley
Economics is difficult
The
yes, you can say but the positive thinkers and doers can not say like it.
Gajendra
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The
and I procrastinate too much
The
is true
Souley
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Kojo
what's the scope for an economist?
Aman
no idea
Steven
I'm having exams soon but I barely know the concepts, monopoly is difficult
Steven
I can help with assignments
Nhamo
Gajendra or anybody can you advice me on how I can improve on studying Economics
The
should I read a topic everyday. it will be difficult because I have other courses
The
what's unemployment
increase in inflation
Zain
increase in jobless peaople
Zain
who are capable of doing job
Zain
hi
Vijay
hi
Zain
distinguish between substitution effect and income effect
hello
Kojo
hi
Peter
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Abdal
Hi
Anamaya
Watsup
Darlington
Hello
Darlington
hi
Abdal
Who is an economist
Darlington
Hi
Ihtisham
hi
Peter
hi
Abdal
yes
Fazal
still studying
sean
The substitution effect is the change in consumption patterns due to a change in the relative prices of goods.
Moshood
Income effect is the change in consumption patterns due to the change in purchasing power.
Moshood
still freshman studying at Tubman University
Emmanuel
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Brahim
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Chidi
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God
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Owusu
Hi
Patricia
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Rod
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shaikh
what is agriculture?
Emmanuel
Srsly
Neil
Hi everyone.
Royal
Economic is a subject which study buying and selling.
Royal
can u elaborate more?
Dazy
it is the study of the wealth of of a nation
It can also be defined as the social science that studies how the available scarce resources can be distributed to satisfy unlimited human want
elo house !
I ave a question too
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Prtj
guys I have questions which I am not able to solve could you guys help me
Prtj
kartik
Gene
What the difference between economics and economics education?
Rasaq
economics is all about natural resources and how they are distributed to satisfied human wants
Souley
Almsot the same
Steven
The exchange of produce and services among different countries.
Anamaya
the exchange of good & services across international boundaries
WILSON
Nusrat
Compare and contrast between Natural and Artificial Resources and their ultimate impacts in an economy. Give one example to support your discussion.
Exemple: Diamant or uranium, fer, calcaire
how does interest rate affect aggregate output
what is Keynesian theory
kelvin
need a curves for typical isoquost and isoquant
kelvin
what is isoquant
kelvin
isoquat is a curve shows differnt combinations of two inputs which can produce same level of output
Majid
examples of giffen goods
Getrude
then what isoquost
Peter
, if the price of an essential food staple, such as rice, rises it may mean that consumers have less money to buy more expensive foods, so they will actually be forced to buy more rice.
Peter
that's an example
Peter
majid Khan that's the wrong definition of isoquant
The
you are defining isocost
The
isocost curve is a locus of points that shows the different combinations of commodities purchased by a consumer with a fixed budget
The
The change in fiscal policy leads to an increased level of output and interest rates is because an increase in government expenses directly affects aggregate demand. A decline in taxes result in more disposable income, consequently leading to a rise in consumption expenditure.
Peter
dats for kelvin
Peter
dats d answer for the audio how does interest rate affect aggregate output
Peter
question not audio
Peter
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Peter
what is journal entry?
Abel
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interpret micro economic issues
Matilda
ito ang dami ng producto na nais handa at kanyang ibenta ng isang prodyuser
i dont understand
Gaabshe
even I also don't understand ..this language.. vn I converse everybody say farzana ur language is not understood by all user? now no one there is question about it?
shaikh
he is saying that "this is the amount of product it wants to be ready and sells by a producer"
Aman
I Merr has knowledge,which is the economiccircuit role in a society
What is diminishing returns?
explain competitive demand
the demand that are compiting for sale. the buyer can substitute one for another good
Iftikhar
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Margarette
the demand where commodities fight for the market. in this type of demand, commodities can be substituted for the most suitable one subject to ( price, consumers choice, consumers income etc)
WILSON
Demand is said to be competitive when a commodity that is needed to satisfy wants in place of another similar goods. increase in price of a commodity X will result in increase in demand of the substitute (commmodity Y).
yusuf
examples of giffen goods are garri (cassava), maize