Question

Briefly contrast when losses will be the smallest for a perfectly competitive firm based on total revenues with when losses for such a firm will be smallest based on marginal revenue.

Answer 1

Perfect competition applies when there are many producers and consumers in the market and no single company can influence the pricing.

Marginal revenue is the additional revenue that will be generated by increasing product sales by one unit. In a perfectly competitive market, the price of the product stays the same when another unit is produced. Marginal revenue is calculated by dividing the change in total revenue by the change in output quantity.For example, if the price of a good in a perfectly competitive market is $20, the marginal revenue of selling one additional unit is $20.

MR (Marginal Revenue) = Change in Total Revenue / Change in Quantity

In order to maximize profits in a perfectly competitive market, firms set marginal revenue equal to marginal cost (MR=MC). MR is the slope of the revenue curve, which is also equal to the demand curve (D) and price (P). In the short-term, it is possible for economic profits to be positive, zero, or negative. When price is greater than average total cost, the firm is making a profit. When price is less than average total cost, the firm is making a loss in the market.

Marginal revenue is the additional revenue from the sale of additional units so the loss from marginal revenue will be low.