How The Firm Chooses The Level Of Output That Maximises Profit Under Perfect Competition

1652 words - 7 pages

In the market, there are two important roles梥ellers and buyers, who make up the market. Mankiw (2007) indicates that a seller抯 final goal is gain the maximum profit. It should be associated that the firm is a part of sellers, so the firm also desires to gain profit-maximizing in the competitive market. This essay will focus on the firm when it is in the perfectly competitive market. Firstly, it will define some crucial concepts, such as total cost, average cost and marginal cost in terms of cost. Then, it will apply some crucial concepts to explain why marginal revenue and marginal cost are significant and it will explain marginal revenue in detail, especially under perfect competition. Subsequently, this essay will employ one graph to analyse how the firm chooses appropriate level of output to maximize the profit under perfect competition. Finally, it will briefly summarise the main points of this essay.Firstly, this essay regards profit as economic profit; it means opportunity cost has been considered. Burkett and John (2006) claim that profit is the difference between total revenue (TR) and total cost (TC), cost appears significant to some extent. Mankiw (2007) holds that cost is a crucial element of determining quantity and price of production. Therefore, clearly understanding the concepts of total, average and marginal costs seems essential. In respect of total costs, Dodge and Eric (2004) demonstrate that total cost is cost that a firm invest to produce. It comprises fixed cost (FC) and variable cost (VC). Fixed cost refers to cost that does not change when the level of output changes, just like the existence plant. Additionally, variable cost means cost that changes when quantity produced (Q) changes (Salvatore and Dominick, 2006). Regarding average cost, it implicitly means average total cost (ATC) and it is defined as cost per unit of output (Nicholson, 2002). It is explicitly expressed that: ATC = TC/ Q. Average total cost means the sum of average fixed cost (AFC) and average variable cost(AVC). Meanwhile, AFC=FC/Q; AVC=VC/Q. In terms of marginal costs, McConnell and Brue (2007) claim that marginal cost is the incremental change in total cost with extra unit produced. For instance, it costs to produce one bike and 0 to produce two bikes, marginal cost is .By understanding these costs concepts; it can be easier to understand the next part involved with how the firm chooses the level of output that can maximize profit under perfect competition.To analyze how to choose the level of output to maximize profit, it should aware the importance of marginal revenue and marginal cost (MC). Firstly, total revenue is the price (P)times quantity of production sold, accordingly, Profit=TR-TC=P譗-ATC譗 =(P-ATC) Q (Mankiw, 2007). It reveals that when price is established, average cost can influence profit. However, marginal cost can influence average cost. For instance, when marginal cost of producing another unit exceeds...

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