Price-Taker Markets and Firm Profit Maximization
The Long-Run Average Total Cost Curve
The long-run average total cost curve is an envelope-shaped curve mapped out by the short-run average total cost curves.
Short-Run Cost Calculations
In the short run, if average variable costs equal $45, average total costs equal $50, and output equals 100, the total fixed costs will equal $500.
In the short run, if average variable cost equals $50, average total cost equals $75, and output equals 100, the total fixed cost must be $2,500.
If fixed cost at quantity (Q) = 100 is $130, then fixed cost at Q = 200 is $130.
Marginal Cost and Average Total Cost Relationship
As output is expanded, if MC is more than ATC, then ATC must be increasing.
Profit-Maximizing Price Taker
If the price is above average variable cost and below average total cost, a profit-maximizing price taker should continue producing as long as it expects the market price to rise above average total cost in the near future.
Scenario: Competitive Price-Taker Firm
Assume a certain competitive price-taker firm is producing Q = 1,000 units of output. At Q = 1,000, the firm’s marginal cost equals $15 and its average total cost equals $11. The firm sells its output for $12 per unit.
At Q = 1,000, the firm’s profit amounts to $1,000.
Price-Taker Model and Profit Maximization
Within the framework of the price-taker model, a price taker will always produce a quantity of output that maximizes total revenue minus total cost.
Price-Taker Market Dynamics
Which of the following best explains why a firm in a competitive price-taker market must take the price determined in the market?
- If a price taker increased its price, consumers would buy from other suppliers.
Example: Wheeler Wheat Farm
The Wheeler Wheat Farm sells wheat to a grain broker in Seattle, Washington. Since the market for wheat is generally considered to be competitive, the Wheeler Wheat Farm maximizes its profit by choosing the quantity at which the farm’s marginal cost of production is equal to the market price.
Barriers to Entry
When a law is passed that requires businesses to obtain permission from government officials in order to enter a market, this is an example of a barrier to entry.
Price-Taker Definition
When we say that a firm is a price taker, we are indicating that the firm can change output levels without having any significant effect on price.
Average Variable Costs and Marginal Cost
Which of the following must be true if average variable costs are decreasing?
- Marginal cost is less than average variable cost.
Factors Increasing Average Total Costs
Which of the following would increase a firm’s average total costs?
- An increase in input prices.
Price-Taker Market Characteristics
A firm in a price-taker market must take the price that is determined in the market.
Firm’s Decision to Decrease Output
A firm is currently operating where the MC of the last unit produced is $84, and the MR of this unit is $70. What would you advise this firm to do?
- Decrease output.
Price-Taker Output and Market Price
A firm that is a price taker can sell all of its output at the market price.
Price-Taker Firm’s Demand Curve
For a firm in a price-taker market, the firm’s demand curve is a horizontal line at the market price that is equal to the firm’s marginal revenue curve.
Marginal Revenue Exceeding Marginal Cost
If a competitive price-taker firm is currently producing a level of output at which marginal revenue exceeds marginal cost, then a one-unit increase in output will increase the firm’s profit.
Profit Maximization in Price-Taker Markets
If a firm competing in a price-taker market seeks to maximize profit, the firm should increase output whenever the price exceeds marginal cost.
If a firm is a price taker and wants to earn as much profit as possible, it should expand output as long as marginal cost is less than the price.
Zero Economic Profit
If a firm is making zero economic profit, it is doing as well as typical firms in other markets.
Price-Taker Firm Raising Prices
If a price-taker firm selling in a competitive market offers its product at a higher price than others, it will not be able to sell any output.
Expanding Output
If marginal revenue exceeds marginal cost, a price-taker firm should expand output.
Price Increases in Competitive Markets
In competitive price-taker markets, if one firm raises its price, that firm will lose revenues because other firms will not follow.
Profit Maximization Point
The intersection of a firm’s marginal revenue and marginal cost curves determines the level of output at which profit is maximized.