Output Decisions for a Price-taking Firm

For a price-taking firm, market price $P$ does not change when the firm adjusts its own output. Total revenue is

Average revenue is $AR=TR/Q=P$. Each extra unit adds the same price to revenue, so marginal revenue is also $MR=P$. The firm's demand, AR, and MR curves coincide as a horizontal line.

Quantity is still a choice

Taking price does not mean accepting any quantity. The firm compares the revenue from added output with the cost of producing it. If rice sells for 18 per bag, the first, second, and tenth bags each add 18 to revenue, but their marginal costs can differ.

The firm also chooses whether to operate at all. At very low prices, revenue may not cover avoidable costs. At intermediate prices it may produce despite an accounting or economic loss because production covers variable cost and part of fixed cost.

Firm demand versus market demand

If one small seller raises its price above the market price for an identical product, buyers switch away. If it posts below market price, it can sell but receives less than necessary. This sensitivity makes firm demand horizontal in the ideal model.

By contrast, all firms together cannot expand market quantity without moving along consumer demand. Keep the level of analysis explicit: market price is determined by market demand and supply, then taken as given by each competitive firm.

Build the revenue table

At market price 14, quantities from zero to four produce total revenue of 0, 14, 28, 42, and 56. For every positive quantity, average revenue is 14. Each one-unit increase adds 14, so MR is also 14.

This does not mean the market demand curve is horizontal. If every seller expands, total market quantity rises and the market price may fall. The horizontal line belongs to one tiny firm while the market equilibrium is treated as given.

Separate price from quantity choice

The stall cannot profitably charge 16 for an identical bag when rivals charge 14, and charging 12 gives away two units of revenue without creating a useful advantage. Its real decision is how many units to produce at 14. That decision requires the cost information developed in the previous chapter.

When analyzing a price-taking firm, first take market price as given, construct $TR=P\times Q$, recognize $MR=P$, and then compare that marginal revenue with MC. Do not start by choosing a price.