PERFECT COMPETITION IN THE SHORT RUN Microeconomics Made Easy by William Yacovissi Mansfield University © William Yacovissi All Rights Reserved

TOTAL & MARGINAL REVENUE l Profit is the difference between total revenue and total cost. l Total revenue is the price of the product times the number of units sold. l Marginal revenue is the change in total revenue if one more unit is sold

TOTAL & MARGINAL REVENUE l If a firm faces intense competition, it is basically forced to sell the product at the prevailing market price. l Because these companies are small relative to the market, they generally can sell all that they produce at the prevailing market price.

TOTAL & MARGINAL REVENUE l Think midwestern wheat farmers. The market determines the price of wheat. The farmer can sell the whole crop at the market price. l Whether the farmer planted 2,000 acres or 4,000 acres is irrelevant. The whole crop will still be sold at the market price.

TOTAL & MARGINAL REVENUE l For a firm in a competitive market, the marginal revenue is simply the price of the product and is constant over the feasible range of production.

PROFIT MAXIMIZATION l What a company is looking for is the level of production that generates the largest gap between total revenue and total cost l It turns out that the level of production at which marginal revenue equals marginal cost generates the largest profits. l For a competitive firm P = MR so for a competitive firm profit is maximized when P = MC

FIRM EQUILIBRIUM l The Problem facing a competitive firm is illustrated on the following graph. l The firm compares the prevailing market price to its marginal cost curve to determine the profit maximizing level of production l Profit per unit is the difference between the price and the average cost.

FIRM EQUILIBRIUM

l One important point form the diagram above is the finding that the firm should adjust output whenever market price changes. l When market price increases, production should increase and when market price falls, production should be decreased.