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Total cost and total revenue at the raspberry farm
Quantity
(Q)
Total Cost
(TC)
Fixed Cost
(FC)
Variable Cost
(VC)
Total Revenue
(TR)
Profit
0 $62 $62 - $0 −$62
10 $90 $62 $28 $40 −$50
20 $110 $62 $48 $80 −$30
30 $126 $62 $64 $120 −$6
40 $144 $62 $82 $160 $16
50 $166 $62 $104 $200 $34
60 $192 $62 $130 $240 $48
70 $224 $62 $162 $280 $56
80 $264 $62 $202 $320 $56
90 $324 $62 $262 $360 $36
100 $404 $62 $342 $400 −$4

Based on its total revenue and total cost curves, a perfectly competitive firm like the raspberry farm can calculate the quantity of output that will provide the highest level of profit. At any given quantity, total revenue minus total cost will equal profit. One way to determine the most profitable quantity to produce is to see at what quantity total revenue exceeds total cost by the largest amount. On [link] , the vertical gap between total revenue and total cost represents either profit (if total revenues are greater that total costs at a certain quantity) or losses (if total costs are greater that total revenues at a certain quantity). In this example, total costs will exceed total revenues at output levels from 0 to 40, and so over this range of output, the firm will be making losses. At output levels from 50 to 80, total revenues exceed total costs, so the firm is earning profits. But then at an output of 90 or 100, total costs again exceed total revenues and the firm is making losses. Total profits appear in the final column of [link] . The highest total profits in the table, as in the figure that is based on the table values, occur at an output of 70–80, when profits will be $56.

A higher price would mean that total revenue would be higher for every quantity sold. A lower price would mean that total revenue would be lower for every quantity sold. What happens if the price drops low enough so that the total revenue line is completely below the total cost curve; that is, at every level of output, total costs are higher than total revenues? In this instance, the best the firm can do is to suffer losses. But a profit-maximizing firm will prefer the quantity of output where total revenues come closest to total costs and thus where the losses are smallest.

(Later we will see that sometimes it will make sense for the firm to shutdown, rather than stay in operation producing output.)

Comparing marginal revenue and marginal costs

Firms often do not have the necessary data they need to draw a complete total cost curve for all levels of production. They cannot be sure of what total costs would look like if they, say, doubled production or cut production in half, because they have not tried it. Instead, firms experiment. They produce a slightly greater or lower quantity and observe how profits are affected. In economic terms, this practical approach to maximizing profits means looking at how changes in production affect marginal revenue and marginal cost.

[link] presents the marginal revenue and marginal cost curves based on the total revenue and total cost in [link] . The marginal revenue    curve shows the additional revenue gained from selling one more unit. As mentioned before, a firm in perfect competition faces a perfectly elastic demand curve for its product—that is, the firm’s demand curve is a horizontal line drawn at the market price level. This also means that the firm’s marginal revenue curve is the same as the firm’s demand curve: Every time a consumer demands one more unit, the firm sells one more unit and revenue goes up by exactly the same amount equal to the market price. In this example, every time a pack of frozen raspberries is sold, the firm’s revenue increases by $4. [link] shows an example of this. This condition only holds for price taking firms in perfect competition where:

Questions & Answers

what is the effect of inflation in GDP
ahmed Reply
Not only real GDP but also nominal GDP will decrease
Aqib
yep. Inflation has an influence not only GDP but interest rate also.
Hamza
The pound weakens so imports become more expensive and exports lose value - lower GDP.
Rebecca
why do inflation effect economic
Chelsea Reply
explain in detail what is economic what is scarcity what is alternate uses
Ejiro Reply
What is law of demand
Hilary
economic as a science refers to study of human resource
Kaunda
Law of demand- With all the factors remaining same if price increases of a commodity, the quantity of demand of that commodity decreases and vice versa
Dey
Thanks dey sunita
Hilary
What is law of supply
Hilary
what are the factors that affect demand
Elly Reply
what are the factors that affect demand of a good
Elly
what are the factors that affect demand of a good
Elly
what are the factors that affect demand of a commodity
Elly
1. the price of the product 2. the price of other products 3. consumers income 4. expectation of future changes in price 5. taste and preference etc.
ALI
Change in price
Hilary
1. price related of commodities 2. consumers income 3. the condition or season of the commodities
Tsai
decrease in demand of substitute increase in demand of constituent change in quantity and other environmental factors
Hamza
Nd consumer's income
Hamza
what course scarcity
Bashari Reply
Scarcity is the limited availability of a commodity, which may be in demand in the market or by the commons. Scarcity also includes an individual's lack of resources to buy commodities. The opposite of scarcity is abundance.
Marc
Reasons that explain why the division of labor increases an economy's level of production
Chukwuka Reply
Please I don't understand the meaning and the concept of economics as a science
Ophelia Reply
economics as a science refers to the study of human behavior. how they make decisions etc
Saidou
economics is science because it uses scientific methods in analysing societal problems.. observation experimentation and conclusion inherently are used to analyse. however it is not pure science but social science because it studies human and it's environs
Bonney
what's elasticity of demand
Isaac Reply
are u asking because you don't know or what
Stephen
A measure of the responsiveness of a product demanded to a change in market price
Yuusuf
the degree of responsiveness of a product demanded to a little change in the price
Saidou
the degree of responsiveness of quantity demanded of a commodity to the changes in the price if the commodity in question, changes in the price of other related commodities and changes in the income of consumer
Bonney
what is international trade
Kwame Reply
international trade is a trade between foreign country
IYke
it is the exchange of goods and services between countries
Bonney
it's the exchange of goods and services from one foreign country to another
Israel
how is demand run
Ogonna Reply
what s the causes of poverty for human being
Femi Reply
lack of knowledge and resources
Asrat
it is lack of inclusive political and economic institutions in that country given a strong central government.
tesfaye
luck of economics
Donkor
poverty is due to poor system of taxation
Hamza
progressive system of taxation can reduce poverty
Hamza
lack of knowledge
IYke
Isn't it poor system of taxation that causes poverty
Chukwuka
How is a monopoly market different from an oligopoly one?
Antony Reply
Qn.5.a)explain four ways on how elasticity of demand determines the incidence of tax b)design five mechanisms that can be uxed to reduc the gvt expendture in develping countriex lik tz
ALLY
l dont know can l have brief notes
Hilda
What is anatomy and physiology
emeka Reply
Important of monopoly
Daniel Reply
Importance of monopoly
Ibrahim Reply

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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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