Total, Average, and Marginal Revenue
farm decided in one year to produce nothing and in another
year managed to produce twice the average output of 2840
tonnes. This is an extremely large variation in one farm’s
output. The increase in output from 0 to 5680 tonnes
represents a 200 percent variation measured around the farm’s
average output. Yet the percentage increase in world output is
only. Given that the
world’s demand for wheat has a price elasticity of about 0.25,
this increase in output would lead to a decrease in the world
price of 0.003 percent.
This very small decline in price, together with the 200 percent
increase in the farm’s own output, implies that the farm’s own
demand curve has an elasticity of. This
enormous elasticity of demand means that the farm would
have to increase its output by over 66 000 percent to bring
about a 1 percent decrease in the world price of wheat.
Because the farm’s output cannot be varied this much, it is not
surprising that the farmer regards the price of wheat as
unaffected by any change in output that he or she could
conceivably make. For all intents and purposes, the individual
farmer faces a perfectly elastic—horizontal—demand curve for
the product and is thus a price taker.( 5680 / 740 million)× 100 =0.0008percent66666 (= 200 /0.003)