Economics Micro & Macro (CliffsAP)

Revenues for a Perfectly Competitive Firm

For a perfectly competitive firm, its revenue schedule is exactly the same as its demand schedule (the demand curve is
the same as the revenue curve). Figure 10-3 illustrates the revenue and demand schedules.

Figure 10-3

The total revenue is calculated by multiplying price by quantity. In our illustration, total revenue increases by the same
amount each time: 200. Each unit sold adds exactly its constant price to total revenue. When a perfectly competitive
firm decides to change its output, it must consider how this change will affect its total revenue. Marginal revenue (the
change in revenue when selling one additional unit of output) will be equal to price for a perfectly competitive firm.

Remember that the price lines in a perfectly competitive firm are horizontal. This demonstrates a market price. The aver-
age revenue for a perfectly competitive firm is calculated by dividing total revenue by quantity, and the marginal revenue
is the change in total revenue as one more product is sold. If only one price is represented, average and marginal revenue
have to be the same. Figure 10-4 shows the firm’s graph with average total cost and average variable cost.

Figure 10-4

This is a graph commonly associated with perfectly competitive firms because of the horizontal price lines that illustrate
a perfectly elastic demand for the firm. The four possible prices do not mean the firm has a choice of prices; remember
that the firm is a price taker, and these are just four possible scenarios of market prices. Firms determine their profit-
maximizing points at the quantity where MR = MC. The long-run condition for a perfectly competitive firm is when you
have the minimum point of the average total cost (ATC) curve (productive efficiency) combined with the point where the
MC curve intersects with marginal revenue (allocative efficiency).

Quantity

MC

ATC

AVC

Costs and Price

p^1

p^2

p^3

p^4

p^5

p^6

Q^1 Q^2 Q^3 Q^4

Price

$200

200

200

200

200

Quantity Demanded

0

1

2

3

4

Total Revenue

0

200

400

600

800

Marginal Revenue

200

200

200

200

Demand Schedule For Firm Revenue Schedule For Firm

Part III: Microeconomics