If the firm sells a higher quantity of output, then total revenue will increase. The formula above shows that total revenue depends on the quantity sold and the price charged. Determining the Highest Profit by Comparing Total Revenue and Total CostĪ perfectly competitive firm can sell as large a quantity as it wishes, as long as it accepts the prevailing market price. When the perfectly competitive firm chooses what quantity to produce, then this quantity-along with the prices prevailing in the market for output and inputs-will determine the firm’s total revenue, total costs, and ultimately, level of profits. It implies that the firm faces a perfectly elastic demand curve for its product: buyers are willing to buy any number of units of output from the firm at the market price. This is already determined in the profit equation, and so the perfectly competitive firm can sell any number of units at exactly the same price. Since a perfectly competitive firm must accept the price for its output as determined by the product’s market demand and supply, it cannot choose the price it charges. Profit = Total revenue − Total cost = ( Price ) ( Quantity produced ) − ( Average cost ) ( Quantity produced ) Profit = Total revenue − Total cost = ( Price ) ( Quantity produced ) − ( Average cost ) ( Quantity produced )
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