The firm doesn’t make a profit at every level of output. The difference is 75, which is the height of the profit curve at that output level. The vertical gap between total revenue and total cost is profit, for example, at Q = 60, TR = 240 and TC = 165. (Figure) shows total revenue, total cost and profit using the data from (Figure). One way to determine the most profitable quantity to produce is to see at what quantity total revenue exceeds total cost by the largest amount. At any given quantity, total revenue minus total cost will equal profit. All these cost curves follow the same characteristics as the curves that we covered in the Production, Costs and Industry Structure chapter.īased on its total revenue and total cost curves, a perfectly competitive firm like the raspberry farm can calculate the quantity of output that will provide the highest level of profit. The total cost curve intersects with the vertical axis at a value that shows the level of fixed costs, and then slopes upward. The vertical axis shows both total revenue and total costs, measured in dollars. The horizontal axis shows the quantity of frozen raspberries produced in packs. (Figure) graphically shows total revenue and total costs for the raspberry farm, also appear in (Figure). If, for example, the price of frozen raspberries doubles to □8 per pack, then sales of one pack of raspberries will be □8, two packs will be □16, three packs will be □24, and so on. Sales of one pack of raspberries will bring in □4, two packs will be □8, three packs will be □12, and so on. As an example of how a perfectly competitive firm decides what quantity to produce, consider the case of a small farmer who produces raspberries and sells them frozen for □4 per pack. If the market price of the product increases, then total revenue also increases whatever the quantity of output sold. If the firm sells a higher quantity of output, then total revenue will increase. The formula above shows that total revenue depends on the quantity sold and the price charged. Determining the Highest Profit by Comparing Total Revenue and Total CostĪ perfectly competitive firm can sell as large a quantity as it wishes, as long as it accepts the prevailing market price.
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