How Perfectly Competitive Firms Make Output Decisions

All flashcards

What is a price taker?

A firm that accepts the market-determined price because its own production is too small to influence the price.

Why is a competitive firm’s demand curve horizontal?

Buyers can obtain the standardized product from many sellers, so an individual firm can sell at the market price but cannot profitably charge a higher price.

How is total revenue calculated?

Multiply the price per unit by the quantity sold: $TR=P\times Q$.

How is profit calculated?

Subtract total cost from total revenue: $\text{Profit}=TR-TC$.

How does the total-revenue and total-cost method identify the best output?

Calculate profit at each output level and choose the quantity with the greatest value of total revenue minus total cost.

Quiz questions

1. Why is an individual perfectly competitive firm called a price taker?Answer: It accepts the market-determined price because its own output is too small to affect the market price.
2. What is the shape of the demand curve facing an individual perfectly competitive firm?Answer: A horizontal line at the market price, reflecting perfectly elastic demand.
3. A firm sells 10 units for $4 each. What is its total revenue?Answer: $40
4. If total revenue is $160 and total cost is $138, what is profit?Answer: $22
5. A firm earns $90 at both 70 and 80 units, but earns less at 90 units. What does this indicate?Answer: The firm should compare profits across quantities; producing beyond the most profitable range can reduce profit.