[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

REVENUE ($)
400,000
360,000
0
Revenue
curve
9 10
OUTPUT (NUMBER OF VIOLINS)
The relationship between revenue and output is shown by the
revenue curve in Figure 7.1. The horizontal axis measures the
firm’s output, while the vertical axis measures the revenues. When
the price of a violin is $40,000 and the firm sells 9 violins, its
revenue is $360,000; when it sells 10, revenue rises to $400,000.
The extra revenue that a firm receives from selling an extra
unit is called its marginal revenue. Thus, $40,000 is the extra
(or marginal) revenue from selling the tenth violin. It is no accident
that the marginal revenue equals the price of the violin. A
fundamental feature of competitive markets is that firms receive
the same market price for each unit they sell, regardless of the
number of units they sell. Thus, the extra revenue that firms in
competitive markets receive from selling one more unit—the
marginal revenue—is the same as the market price of the unit.
FIGURE 7.1
THE REVENUE CURVE
Costs
The revenue curve shows a firm’s revenues at each level of
output. For the firm in a competitive industry, price does not
change as more is produced, so the revenue curve is a straight High Strung’s costs increase as it expands its level of output. Total
line with a constant slope. In this example, the revenue yielded costs are given in column 1 of Table 7.2 and depicted diagrammatically
in Figure 7.2A. Panel B shows the corresponding average
by each additional violin is always $40,000.
and marginal costs. High Strung’s average cost curve exhibits the
typical U-shape that we associate with manufacturing firms.
Even before it builds its first violin, the company must spend $90,000. Space
must be rented. Some employees will have to be hired. Equipment must be purchased.
No matter how many or how few violins High Strung produces, its fixed
costs will remain $90,000.
TABLE 7.1
PROFIT-AND-LOSS STATEMENT FOR THE HIGH STRUNG VIOLIN COMPANY
Gross revenue $280,000
Costs $175,000
Wages (including fringe benefits) $150,000
Purchases of wood and other materials $ 15,000
Utilities $ 1,000
Rent of building $ 5,000
Rent of machinery $ 2,000
Miscellaneous expenses $ 2,000
Profits $105,000
156 ∂ CHAPTER 7 THE COMPETITIVE FIRM