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

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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.

what us maxima and minima
Maxima s below equilibrium. Whilst minima s above. Equilibrium
Afran
Wht is demand
Afran
is the willingness and the ability of a consumer to purchase goods at a given price and at a particular point in time.
Assan
Afran
why is the demand curve downwards sloppy?
Assan
3 Reasons.. 1... diminishing marginal utility 2... substitution effect 3...income effect
Harshita
thanks
Assan
Because of the negative or inverse relationship between price and quantity demanded
Afran
what is the law of diminishing returns states?
Assan
ohk
Assan
The law states that all other things being equall as much of variable factor(labour) is employed on fixed factor(land) the marginal product rises..attain a maximum and begins to fall.
Afran
What is income elasticity of demand
Afran
what is monetary policy
Edward
Monetary policy is an attempt to influence the economy by opera ting in such monetary variables
Afran
thanks
Edward
Wlcm
Afran
Wht is disutility?
Afran
is disutility? is rightly writing?
Yhlas
is it i wanna say
Yhlas
Afran
what is macro economics?
Oyas
the branch of economics concerned with large-scale or general economic factors, such as interest rates and national productivity.
idk
in other words it is the study of the economic as a whole
idk
What is an Economic growth
Economic growth is the process whereby the real per capita income of an economy increases over a long period of time.
Nureni
what is the generally accepted defination of economics and by who
Economics is defined by Lionel Robbins as a social science which studies human behaviour as a relationship between ends and scarce means which have alternative uses
Tba
Importance of economic
Helps in decision making
MP
I need like 5 importance
Achike
hi
Physcal
Hey
hellow dear.
juwel
hello
Al-ameen
Hello
MP
it helps an individual in rational decision making process
Assan
Fine and u
Buzabaryaho
how does it make individual in rational dicision making decisions
Annor
if an individual is faced with unlimited wants.
Assan
it also helps an individual in arranging their wants in order of their importance.
Assan
ohk
Annor
ok
Al-ameen
Hello guys
Please what is a scale of preference used for?
it's use for arranging wants in order of their importance.
Assan
in other words when an individual is faced with unlimited wants,scale of preference would help the individual to select the most important wants.
Assan
Thanks
welcome
Assan
what is tourism
Tourism is travel for pleasure or business
Yusuf
It is the commercial organization and operation of holidays and visits to places of interest.
Nureni
who is a price taker?
A price taker is a person or a company who have no control to dictate a prices of a goods or services
Unique
Someone who sets price
Nureni
In the trading world, a price taker is a trader who does not affect the price of the stock if he or she buys or sells shares.
Nureni
A price taker refers to a firm or an individual who sets the price of his good and services based on an external factor. In other words he cannot choose and set a price by himself. An example is a firm operating in perfect competition where prices are set through the price mechanism.
Tba
in a common and suitable sense state the law of diminishing returns
The higher the satisfaction derived from a particular commodity,the lower the demand for it but that law doesn't match in some instances.
Nureni
state the features of an imperfect competitive market
Naomi
@NURENI instance like wat
Unique
imperfect competitive market involves large number of sellers and buyers price makers selling cost product differentiation free entry and exit of a firms
Unique
is economics a science
yes. a social science.
Carlos
Yes of cause It uses scientific principles in its research. That is to say, analyzing data, making experiment as well as making deductions and drawing conclusions
Aziz
U can understand the scientific nature of economics by learning about the methods used by Abhijit Banerjee(indian) ,the nobel prize laureate 2019.
Harshita
it is considered as a social science
idk
Hence, economics is a science, a social science many can call it, or more appropriately, a young science
Taha
it can be called social science because of behaviour ,which is unpredictable.There r many theroies in economics which make economics a social science But some economic theories makes it science
Harshita
human behaviour*
Harshita
remember science derives from the root words "to know". With that being said most fields of study can be considered as a science or soft science, for they possess key knowledge to attaining understanding of our world.
Alexander
economics is a science cos it deals with human wants, desire or neads in order to satisfy them
Unique
according comparision of political science economic is science.
Hassan
what's the question?
Discuss economics system
discuss institutional system
Henry
Give 3 at most advantages and disadvantages of economics system and institutional syatem
Henry
Give the features characteristics of market or free enterprise
Henry
The structure of an economy is largely determined by the economic system which is a function of the economic ideology of the nation
Nureni
The economic system is grouped into 5 groups: 1: Pure market 2: Developed market 3: Centrally planned or Socialist 4: Mixed market and 5: Market Socialist Economic systems
Nureni
what is inflation
Inflation is a sustained and general rise in the price of all goods and services of an economy
Tba
hello everyone , I'm New here, third degree price discrimination?
2nd degree price discrimination?
Saeed
hi
Kini
hi
Mitchel
Hi
MP
price paid by consumers after the sales tax is called?
why government impose price floor on certain products?
Pinias
how can black market be occurred when price ceiling is introduced?
Pinias
How can inflation affect goods and services?
Ph
When prices rise for energy, food, commodities, and other goods and services, the entire economy is affected
Joan
If inflation becomes too high the economy can suffer conversely, if inflation is controlled and at reasonable levels, the economy may prosper. With controlled, lower inflation, employment increases.
Joan
Is it necessary to make decision when it fails you
Pls when what fails u
MP
I think so
Kini
well i might naught know what you on about but i gotta tell you, it is necessary
Troy
yep
Ibe
Kk
MP
yep
Ibe
how can the demand side approach solve unemployment
demand solves unemployment when it is addressed with supply you can't just expect demand to work alone without supply the two are interconnected
Nureni
You have to apply the concept of aggregate demand
Tba
That is apply demand side policies to boost aggregate demand hence increasing need for labour and decreasing unemployment(more people get jobs)
Tba