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As discussed in the chapter on Demand and Supply , many of the reasons that supply curves shift relate to underlying changes in costs. For example, a lower price of key inputs or new technologies that reduce production costs cause supply to shift to the right; in contrast, bad weather or added government regulations can add to costs of certain goods in a way that causes supply to shift to the left. These shifts in the firm’s supply curve can also be interpreted as shifts of the marginal cost curve. A shift in costs of production that increases marginal costs at all levels of output—and shifts MC to the left—will cause a perfectly competitive firm to produce less at any given market price. Conversely, a shift in costs of production that decreases marginal costs at all levels of output will shift MC to the right and as a result, a competitive firm will choose to expand its level of output at any given price. The following Work It Out feature will walk you through an example.

At what price should the firm continue producing in the short run?

To determine the short-run economic condition of a firm in perfect competition, follow the steps outlined below. Use the data shown in [link] .

Q P TFC TVC TC AVC ATC MC TR Profits
0 $28 $20 $0 - - - - - -
1 $28 $20 $20 - - - - - -
2 $28 $20 $25 - - - - - -
3 $28 $20 $35 - - - - - -
4 $28 $20 $52 - - - - - -
5 $28 $20 $80 - - - - - -

Step 1. Determine the cost structure for the firm. For a given total fixed costs and variable costs, calculate total cost, average variable cost, average total cost, and marginal cost. Follow the formulas given in the Cost and Industry Structure chapter. These calculations are shown in [link] .

Q P TFC TVC TC
(TFC+TVC)
AVC
(TVC/Q)
ATC
(TC/Q)
MC
(TC 2 −TC 1 )/
(Q 2 −Q 1 )
0 $28 $20 $0 $20+$0=$20 - - -
1 $28 $20 $20 $20+$20=$40 $20/1=$20.00 $40/1=$40.00 ($40−$20)/
(1−0)= $20
2 $28 $20 $25 $20+$25=$45 $25/2=$12.50 $45/2=$22.50 ($45−$40)/
(2−1)= $5
3 $28 $20 $35 $20+$35=$55 $35/3=$11.67 $55/3=$18.33 ($55−$45)/
(3−2)= $10
4 $28 $20 $52 $20+$52=$72 $52/4=$13.00 $72/4=$18.00 ($72−$55)/
(4−3)= $17
5 $28 $20 $80 $20+$80=$100 $80/5=$16.00 $100/5=$20.00 ($100−$72)/
(5−4)= $28

Step 2. Determine the market price that the firm receives for its product. This should be given information, as the firm in perfect competition is a price taker. With the given price, calculate total revenue as equal to price multiplied by quantity for all output levels produced. In this example, the given price is $30. You can see that in the second column of [link] .

Quantity Price Total Revenue (P × Q)
0 $28 $28×0=$0
1 $28 $28×1=$28
2 $28 $28×2=$56
3 $28 $28×3=$84
4 $28 $28×4=$112
5 $28 $28×5=$140

Step 3. Calculate profits as total cost subtracted from total revenue, as shown in [link] .

Quantity Total Revenue Total Cost Profits (TR−TC)
0 $0 $20 $0−$20=−$20
1 $28 $40 $28−$40=−$12
2 $56 $45 $56−$45=$11
3 $84 $55 $84−$55=$29
4 $112 $72 $112−$72=$40
5 $140 $100 $140−$100=$40

Step 4. To find the profit-maximizing output level, look at the Marginal Cost column (at every output level produced), as shown in [link] , and determine where it is equal to the market price. The output level where price equals the marginal cost is the output level that maximizes profits.

Questions & Answers

what is trade by batter
Iko Reply
trade involves the transfer of good or services from one person to another, often in exchange for money.
musadique
Now trade by batter :it may define as form of trading in which good are exchange directly for other goods without the use of money as medium of exchange
musadique
is it good to trade with something with a value but given something which has no value
sandra
trade in batter means the exchange of goods and services without using money
Maa
mention six factors that explain efficiency and productivity of labour
fanelchainz Reply
mention six factors that explain efficiency and productivity of labour
bohvy
factors that explain efficiency of labor are 1.population, 2.technology, 3.education, 4.working environment, 5.incentives (tax holidays) and 6.religious or cultural beliefs.
Solomon
What is demand
SoFIA Reply
is the abulity and willingness of a consumer to purchase goods and services at a particular peeiod of time in a given price
Fadhil
what is a central bank
Fadhil Reply
what is elastic
fadoju Reply
how is equilibrium defined in financial market?
infinity Reply
what is the definition of money
infinity
Money is define as anything that is generally acceptable as a means of exchange nd settlement of dept
Simeon
what is elastic
fadoju
what is demand and supply
Osman
demand is ability of a consumer to purchase a particular good at a particular time
Maa
supply is the ability of a person to be able to provide his costumers with what they need
Maa
how do choices end up determining what, how and for whom goods and services are produced
Ayesha Reply
They end up by using the scale of preference
Maa
there are 10 000 seats available for the Wimbledon tennis Championships. the price per ticket is fixed by the organisers. the supply of seats is thus: A. completely elastic B. completely inelastic C. elastic D. unitary elastic E. elastic which option is the answer?
Esihle Reply
what is international trade
Naomi Reply
the trade between two or more countries outside the territory of own country
Mukeem
it's an international trade
Ivan
Multilateral trade it is
Antony
how do monopolistic firm make profit in the short run and long run
Ediga Reply
oligopolistic competition is known to have a kinked demand curve .why there is such a tease my in oligopolistic form only
Ediga
please can anyone help me in econs
Oppong
Manuel in which context
Daizy
please in utility
Oppong
what is demand ?
Tonight Reply
The amount of some goods or services consumers need to purchase
Adu
The amount of goods or services that consumers are willing and can afford to purchase.
Ivan
it is goods and services consumers are willing and able to buy at given price over a given period of time
Rebecca
as quantity of good and service that a consumer is willing and able to purchase at a given price and at the particular market price.
MOHAMMED
The amount of goods and services consumers are able and willing to buy and pay for at a given price and at given point in time.
Solomon
refers to the quantity of goods and services that customers are willing and able to purchase at various prices over a period of time
Ryt
Demand may define as goods and services which a consumer is willing to buy at a given price over a perticular market price
Osman
what are subsidies
Yaya Reply
how do trade unions deal with subsidies
Yaya
bro can you explain decision making
WhatsApp
Decision making is a process to use your limited resources for best productive purpose.
Dipam
explain why an increase in national income may not always lead to improvement in economic wellbeing of all the citizens?
Mendo
How many types of labour do we have pls
ROA
two
nabil
skilled and unskilled labour
nabil
Thanks 🙏
ROA
what are the factors that affects efficiency of labour ?
nabil
What are tools of economics analysis
Adu
Adu Tumwah,,, The tools of economics analysis are; Charts, graphs, equations, table, arithemetic mean, etc.
Dennis
Subsidies are payments made by the government to the producers of goods and services
Daizy
what is the marginal revenue if p=10-2q
Karen Reply
what's the difference between demand goods and supply gooda
Spiff Reply
why is 2% the optimal inflation rate in many countries
Spiff
why is 2% the optimal inflation rate in many countries
Spiff
what's inflation
Thando Reply
a general rise in the prices of services and goods in a particular country
Spiff
why is 2% the optimal inflation rate in many countries?
amina
resulting in a fall in the value of money,,
Spiff
for example
Spiff
Inflation is the continuous rise of price of goods and services in a nation
Oluchi
persistent increase in the general price level
Anyere

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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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