If the market price of wheat is 4 a bushel then that

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Unformatted text preview: they can do business. If the market price of wheat is $4 a bushel, then that is the highest price you can get for your wheat. Ask for $4.10 and no one will buy from you. Offer it for $3.90 and you’ll be sold out in a flash and have given away 10¢ a bushel. You take the market price. total revenue that results from a one-unit increase in quantity sold. In the table in Fig. 10.1, when the quantity sold increases from 8 to 9 sweaters, total revenue increases from $200 to $225, so marginal revenue is $25 a sweater. Because the firm in perfect competition is a price taker, the change in total revenue that results from a one-unit increase in the quantity sold equals the market price. In perfect competition, the firm’s marginal revenue equals the market price. Figure 10.1(c) shows the firm’s marginal revenue curve (MR) as the horizontal line at the market price. Demand for the Firm’s Product The firm can sell any quantity it chooses at the market price. So the demand curve for the firm’s product is a horizontal line at the market price, the same as the firm’s marginal revenue curve. 000200010270728684_CH10_p195-220.qxd 6/23/11 4:13 PM Page 197 W hat Is Perfect Competition? 50 S Market demand curve 25 TR 225 A Price (dollars per sweater) Demand, Price, and Revenue in Perfect Competition Total revenue (dollars per day) Price (dollars per sweater) FIGURE 10.1 197 50 Demand for Campus sweaters 25 MR 0 10 20 Quantity (sweaters per day) D 0 9 (a) Sweater market Quantity sold Price (P) 0 20 Quantity (thousands of sweaters per day) 9 20 Quantity (sweaters per day) (b) Campus Sweaters' total revenue Total revenue Marginal revenue (Q) (dollars ( MR = T R / Q ) Q) (dollars per (sweaters per ( TR = P per day) sweater) (dollars) additional sweater) 8 25 200 9 25 225 10 25 250 . . . . . . . . . . . . . . 25 . . . . . . . 25 (c) Campus Sweaters' marginal revenue In part (a), market demand and market supply determine the market price (and quantity). Part (b) shows the firm’s total revenue curve (TR). Point A corresponds to the second row of the table—Campus Sweaters sells 9 sweaters at $25 a sweater, so total revenue is $225. Part (c) shows the firm’s marginal revenue curve (MR). This curve is also the demand curve for the firm’s sweaters. The demand for sweaters from Campus Sweaters is perfectly elastic at the market price of $25 a sweater. animation A horizontal demand curve illustrates a perfectly elastic demand, so the demand for the firm’s product is perfectly elastic. A sweater from Campus Sweaters is a perfect substitute for a sweater from any other factory. But the market demand for sweaters is not perfectly elastic: Its elasticity depends on the substitutability of sweaters for other goods and services. long-run average cost curve. We’ll now see how the firm makes the other two decisions. We start by looking at the firm’s output decision. REVIEW QUIZ 1 The Firm’s Decisions 2 The goal of the competitive firm is to maximize economic profit, given the constraints it faces. To achieve its goal, a firm must decide 3 1. How to produce at minimum cost 2. What quantity to produce 3. Whether to enter or exit a market You’ve already seen how a firm makes the first decision. It does so by operating with the plant that minimizes long-run average cost—by being on its 4 Why is a firm in perfect competition a price taker? In perfect competition, what is the relationship between the demand for the firm’s output and the market demand? In perfect competition, why is a firm’s marginal revenue curve also the demand curve for the firm’s output? What decisions must a firm make to maximize profit? You can work these questions in Study Plan 10.1 and get instant feedback. 000200010270728684_CH10_p195-220.qxd 6/23/11 4:13 PM Page 198 CHAPTER 10 Perfect Competition 198 x The Firm’s Output Decision A firm’s cost curves (total cost, average cost, and marginal cost) describe the relationship between its output and costs (see pp. 180–184). And a firm’s revenue curves (total revenue and marginal revenue) describe the relationship between its output and revenue (p. 197). From the firm’s cost curves and revenue curves, we can find the output that maximizes the firm’s economic profit. Figure 10.2 shows how to do this for Campus Sweaters. The table lists the firm’s total revenue and total cost at different outputs, and part (a) of the figure shows the firm’s total revenue curve, TR, and total cost curve, TC. These curves are graphs of numbers in the first three columns of the table. Total revenue and total cost (dollars per day) FIGURE 10.2 Economic profit equals total revenue minus total cost. The fourth column of the table in Fig. 10.2 shows the economic profit made by Campus Sweaters, and part (b) of the figure graphs these numbers as its economic profit curve, EP. Campus Sweaters maximizes its economic profit by producing 9 sweaters a day: Total revenue is $225, total cost is $183, and economic profit is $42. No other o...
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This note was uploaded on 01/10/2013 for the course ECON 251 taught by Professor Blanchard during the Spring '08 term at Purdue University-West Lafayette.

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