Authors libby rittenberg 475
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Because it is a price taker, each firm in the radish industry assumes it can
sell all the radishes it wants at a price of $0.40 per pound. No matter how
many or how few radishes it produces, the firm expects to sell them all at
the market price.
The assumption that the firm expects to sell all the radishes it wants at the
market price is crucial. If a firm did not expect to sell all of its radishes at
the market price—if it had to lower the price to sell some quantities—the
firm would not be a price taker. And price-taking behavior is central to the
model of perfect competition.
Radish growers—and perfectly competitive firms in general—have no
reason to charge a price lower than the market price. Because buyers have
complete information and because we assume each firm’s product is
identical to that of its rivals, firms are unable to charge a price higher than
the market price. For perfectly competitive firms, the price is very much
like the weather: they may complain about it, but in perfect competition
there is nothing any of them can do about it.
Total Revenue
While a firm in a perfectly competitive market has no influence over its
price, it does determine the output it will produce. In selecting the quantity
of that output, one important consideration is the revenue the firm will
gain by producing it.
A firm’s total revenue is found by multiplying its output by the price at
which it sells that output. For a perfectly competitive firm, total revenue
(TR) is the market price (P) times the quantity the firm produces (Q), or
Attributed to Libby Rittenberg and Timothy Tregarthen
Saylor URL: />
Saylor.org
475
