<< Chapter < Page Chapter >> Page >
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 are the differences between monopoly and.oligopoly
Onome Reply
what are the difference between monopoly and oligopoly
Cbdishakur
The deference between Monopoly and Oligopoly: Monopoly means:A single-firm-Industry producing and selling a product having no close business and Oligopoly means:A market structure where a few sellers compete with each other and each controls a significant portion of market .
Basanta
so that the price-output policy one affects the other.
Basanta
what is economic
Emakpor Reply
what is economic
Cbdishakur
the word economic was derived from the Greek word oikos (a house)and mein(to manage) which in effect meant managing a household with the limited funds available 🙂.
Basanta
good excample about scarsity
hon
An Enquiry into the nature and causes of wealth Nations, this book clearly defined what economic is🙂🙂🙏🙏 thank you...
Basanta
good example about scarcity: money,time, energy, human or natural resources. Scarcity of resources implies that there supply is very much limited in relation to demand.
Basanta
equilibrium is a situation in which economic forces such as demand and supply are balanced and in the absence of external influences,the value of economic variables will not change
Onome Reply
hmnn
Emakpor
marginal cost and marginal revenue is equilibrium .
Kho
yessss
Basanta
what is equilibrium
Rodrice Reply
policy prescriptions for unemployment
Jeslyne Reply
Am working on it
Blacks
Study
Janelle
study
simeon
what are the factors effecting demand sedule
Kalimu Reply
we should talk about more important topics, you can search it on Google n u will find your answer we should try to focus on how we can improve our society using economics
shubham
so good night
hon
ways of improving human capital
kelly Reply
what is human capital
kelly
Capital can be defined as man made assets use in production .
Abdulai
What is the differences between central Bank And Commercial Bank ?. 2 for each
Abdulai
Two types of bank clearing house.
Abdulai
what are the most durable assets of a bank
Ngongang
What is Opportunity Cost?
Cephas Reply
may be defined as expression of cost in terms of forgone alternative.
Abdulai
Helloo, im new, can i get to know more?
Saniya Reply
You ask questions on any topics you find difficult.
Favour
What is opportunity cost?
Cephas
is price elasticity of demand the same as elasticity of demand
Favour Reply
not really
Victoria
hi
Gh
hello
Bhartendu
i hope everyone be ok
Gh
No
Hassan
please explain
Favour
No
William
explanations please
cleophas
price elasticity of demand is the reaction of customers /demand to price changes(increase or decrease) elasticity of demand is the reaction of prices brought about by the change in demand
Victoria
thank you
Favour
state the laws of demand and supply
William
dd: when price rises demand decreases whereas when price reduces dd rises ss: when ss rises the price rises and when ss decreases price also reduces. There is a positive relationship
Dhoonah
nice
Victoria
Draw a demand curve graph
William
though price elasticity and elasticity are used interchangeably, the demand can respond to income changes and prices of related goods as well.
Gurpalak
explain the difference between merit goods and public goods and show why it is possible for profit to be made in the supply of one of these types of good but not the other
Kavishek
Public goods are defined as products where, for any given output, consumption by additional consumers does not reduce the quantity consumed by existing consumers. Merit goods are, for example, education and to some extent the health-care. They are provided by state as "good for you".
ahmed
The ladies are doing much better than the men
Blacks
what happens when there is a shift in demand curve?
Favour
What is Specialization ? Explain in detail
Muhammad
any one ?
Muhammad
specialisation is a method of production whereby an entity focuses on the production of a limited scope of goods to gain a greater degree of efficiency.
Favour
It's ok
Muhammad
hello
Onome
yah
Abdulai
No. price elasticity of demand refers to the manna in which price of good demanded fluctuate mean while elasticity of demand explains the way consumer change in their willingness as they plan or purchase a good
Ngongang
diffirence between demand and supply
Bonny
what is economic
Seray Reply
It is a social science which studies human behavior as a relationship between ends and scarce which have alternative uses
Obeng
what is norminal wage
Demba Reply
is the wages measured in money as distinct from actual purchasing power
Favour
what is demand curve
Azeez Reply
this is a curve that slop downward from left to rich
Obeng
yes
Basanta
different between capital and wealth
Samuel Reply
Wealth refers to the amount of asset you have, while, capital is the amount of cash money you have with you now and willing to invest in any business.
Favour
What is scale of reference?
Finda Reply
What is monopoly?
Finda
It is the control of market by single seller or producer
Mayen
the exclusive possession or control of the supply or trade in a commodity or services
Brains
what does it array
Cbdishakur Reply

Get the best Principles of economics course in your pocket!





Source:  OpenStax, Principles of economics. OpenStax CNX. Sep 19, 2014 Download for free at http://legacy.cnx.org/content/col11613/1.11
Google Play and the Google Play logo are trademarks of Google Inc.

Notification Switch

Would you like to follow the 'Principles of economics' conversation and receive update notifications?

Ask