where:

The formula for marginal revenue is:
192 8 • Perfect Competition

Price Quantity Total Revenue Marginal Revenue

$4

$4

$4

$4

1

2

3

4

TABLE 8.2

$4

$8

$12

$16

-

$4

$4

$4

Notice that marginal revenue does not change as the firm produces more output. That is because under

perfect competition, the price is determined through the interaction of supply and demand in the market and

does not change as the farmer produces more (keeping in mind that, due to the relative small size of each firm,

increasing their supply has no impact on the total market supply where price is determined).

Since a perfectly competitive firm is a price taker, it can sell whatever quantity it wishes at the market-

determined price. We calculate marginal cost, the cost per additional unit sold, by dividing the change in total

cost by the change in quantity. The formula for marginal cost is:

Ordinarily, marginal cost changes as the firm produces a greater quantity.
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