Purely competitive firms increase total revenue by
a. increasing production
b. decreasing production
c. increasing price
d. decreasing price
And your answer is?
increasing production
The correct answer is (a) increasing production.
To understand why increasing production can increase total revenue for purely competitive firms, let's first explore some basic concepts.
In a purely competitive market, there are many buyers and sellers who engage in the exchange of identical products. These firms are price takers, meaning they have no control over the market price and must accept the prevailing price as determined by market forces. They compete solely on the basis of quantity supplied.
Total revenue (TR) is the total amount of money a firm receives from selling its goods or services in a given time period. It is calculated by multiplying the market price of the product (P) by the quantity sold (Q): TR = P x Q.
Now, consider the scenario of a purely competitive firm. If the firm increases its production, it will be able to sell more units of its product. Assuming the market price remains constant, the firm would generate more revenue. This is because the firm is selling a greater quantity of its product and each unit is being sold at the same market price.
On the other hand, if a firm decreases its production, it will sell fewer units of its product. As a result, the total revenue of the firm would decrease because it is selling fewer products at the same market price.
Therefore, to increase total revenue, purely competitive firms should focus on increasing production to sell more units of their product, given the constant market price.