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for the large numbers of firms to exist. If entry was difficult, or restricted, then the number of firms in the market could be small. Perfect information implies that all buyers and all sellers are completely informed about the price, quality and other relevant details about the product, as well as the market. These features result in the single most distinguishing characteristic of perfect competition: price taking behaviour. From the viewpoint of a firm, what does price-taking entail? A price-taking firm believes that if it sets a price above the market price, it will be unable to sell any quantity of the good that it produces. On the other hand, should the set price be less than or equal to the market price, the firm can sell as many units of the good as it wants to sell. From the viewpoint of a buyer, what does price-taking entail? A buyer would obviously like to buy the good at the lowest possible price. However, a price-taking buyer believes that if she asks for a price below the market price, no firm will be willing to sell to her. On the other hand, should the price asked be greater than or equal to the market price, the buyer can obtain as many units of the good as she desires to buy. Price-taking is often thought to be a reasonable assumption when the market has many firms and buyers have perfect information about the price prevailing in the market. Why? Let us start with a situation where each firm in the market charges the same (market) price. Suppose, now, that a certain firm raises its price above the market price. Observe that since all firms produce the same good and all buyers are aware of the market price, the firm in question loses all its buyers. Furthermore, as these buyers switch their purchases to other firms, no “adjustment” problems arise; their demand is readily accommodated when there are so many other firms in the market. Recall, now, that an individual firm’s inability to sell any amount of the good at a price exceeding the market price is precisely what the price-taking assumption stipulates. 4.2 R EVENUE We have indicated that in a perfectly competitive market, a firm believes that it 54 can sell as many units of the good as it wants by setting a price less than or equal y s to the market price. But, if this is the case, surely there is no reason to set a price t m u n lower than the market price. In other words, should the firm desire to sell some r c amount of the good, the price that it sets is exactly equal to the market price. n r A firm earns revenue by selling the good that it produces in the market. Let I i the market price of a unit of the good be p. Let q be the quantity of the good M produced, and therefore sold, by the firm at price p. Then, total revenue (TR) of the firm is defined as the market price of the good (p) multiplied by the firm’s output (q). Hence, TR = p × q To make matters concrete, consider the following numerical example. Let the market for candles be perfectly competitive and let the market price of a box of candles be Rs 10. For a candle manufacturer, Table 4.1: Total Revenue Table 4.1 shows how total revenue is related to output. Notice that when no box is sold, Boxes sold TR (in Rs) TR is equal to zero; if one box of candles is sold, TR is equal to 1×Rs 10= Rs 10; if two boxes of 0 0 1 10 candles are produced, TR is equal to 2 × Rs 10 2 20 = Rs 20; and so on. 3 30 Wecandepicthowthetotalrevenuechanges 4 40 as the quantity sold changes through a Total Revenue Curve. A total revenue curve plots 5 50 Reprint 2026-27