Question

Discuss how firms increase revenue in a perfectly competitive market and how decisions are influenced by consumers

Answer 1

Decisions must be taken while operating a small company to help ensure maximisation of profit and continued progress. Understanding some of the fundamental economic concepts behind the scenes at work will allow businesses of all types and sizes to make better choices that can affect anything from revenue to customer retention. Perfectly competitive companies with multiple buyers and sellers conduct business on a marketplace. Furthermore, all companies manufacture similar goods within a highly competitive market and have very few, if any, barriers to entry. A fully open economy is basically the basis for appraising the economic supply and demand model.

The ideals of a perfectly competitive economy dictate that a horizontal demand curve threatens perfectly competitive firms. That means each company is behaving as a price-taker. So long as the company sells the commodity at market price it can sell as little or as much as it wishes to produce. Perfectly competitive businesses need to realize that setting a price above the existing market price results in customers buying the same commodity from another company, thus negatively impacting a small company's bottom line.

Perfectly efficient companies do need to take production-related decisions, both in the short and long term. As a small company, decisions need to take into account both the future sales and production-related costs. In a reasonably profitable business, income is maximized when the price is equal to the marginal cost associated with output, also known as marginal revenue. As long as revenue is higher than cost, a perfectly profitable firm may opt to produce more in the short term to maximize income.

Profits would be the largest— or the lowest — for a reasonably profitable organization in the quantity of sales where total revenues surpass by the greatest amount of total costs, or where total revenues fall below the lowest amount of total costs.
Gross revenue minus total expense would equal income at any given quantity. One way to evaluate the most profitable quantity to generate is to see which quantity of total sales exceeds by the greater sum of total costs. In the graph above, either the vertical difference between total revenue and total costs reflects income— if total revenue is greater than total costs at a certain amount— or losses— if total costs are greater than total revenue at a certain quantity