My firm focuses on the production of a cheeseburger. However, there is intense competition within the industry; therefore, there is a need for the firm to formulate and implement policies that will improve its profitability. The business has engaged in a perfectly competitive environment with numerous cheeseburger producers and sellers who act independently of each other. Besides, the company has to consider various costs such as variable, marginal, average variable, average total, and fixed costs for its cheeseburger product.
A fixed cost refers to a cost that does not change whether a company registers either an increase or decrease in the number of goods produced or sold. Therefore, fixed costs are expenses that a firm has to pay independent of any business operation or activity. Fixed cost is the cost that my firm has to incur or pay independent of any activity undertaking within the organization, and it must be done whether the business is producing goods or not. Some of the fixed costs that my company is likely to incur include property taxes, the firm’s products entail insurance, and basic salaries (Wood et al., 2016). The production of cheeseburger in my firm is also associated with some variable costs. Variable costs are directly linked to the volume of sales of a product (Liu & Tyagi, 2017). This implies that when the sale of my product increases, the variable costs will increase. Some of the variable costs that may be associated with my product include costs of labor and material, delivery charges, and sales commissions.
The firm meets the characteristics of a perfectly competitive market structure in various ways as it engages in business operations that are not likely to affect the market as a whole. The firm’s product is identical to other organizations’ products. Therefore, the customers would only have to focus on the cost of the product. There are no market entry or exit costs. This implies that the business can easily leave the market in case it is incurring losses, and other firms can enter the market with low start-up costs (Hill & Myatt, 2007). Besides, the firm has a perfect understanding of the customers’ preferences and knows the prices and quantity of cheeseburgers produced and sold by other organizations. Since the customers and the firm are already aware of the other organizations’ cheeseburger prices, the mentioned reasons can affect my ability to set low prices for the company’s product.
The demand curve for this market that includes all companies or businesses is downward sloping, whereas the demand curve for a single firm is flat or perfectly elastic. No matter how a particular firm produces or sells its goods, the market price will not be affected. In this market, the equilibrium quantity of productivity of any given firm is determined by the amount of output that the business chooses to supply. Thus, my firm will have a flat or rather a perfectly elastic demand curve.
Figure 1: Market and firm demand curve in a perfectly competitive market.
Since other firms have already set their prices, I will set my prices between $2-3. The price of the product will depend on various factors such as the location of the firm.
|Type of Costs||Amount ($) in Thousands|
|Total Fixed cost||150|
|Average Fixed cost||30|
|Total Variable cost||100|
|Average Variable cost||50|
|Average Total cost||80|
Table 1: The firm’s total fixed cost, average fixed cost, total variable cost, average variable cost, total cost, average total cost, and marginal cost schedules.
|Type of Cost||Amount ($) in Thousands|
Table 2: The firm’s profit maximizing using price, marginal revenue, and marginal cost schedules.
In a perfectly competitive market structure, the firm’s profits are maximized when the business produces quantity whereby the price is equal to marginal cost and the marginal cost is equal to the marginal revenue. Therefore, my firm will incur a loss of $21,000 in this market structure.
Hill, R., & Myatt, A. (2007). Overemphasis on perfectly competitive markets in microeconomics principles textbooks. The Journal of Economic Education, 38(1), 58-76. Retrieved from https://www.tandfonline.com/doi/abs/10.3200/JECE.38.1.58-77
Liu, Y., & Tyagi, R. K. (2017). Outsourcing to convert fixed costs into variable costs: A competitive analysis. International Journal of Research in Marketing, 34(1), 252-264. Retrieved from https://www.sciencedirect.com/science/article/abs/pii/S0167811616300878
Wood, L., Hemphill, R., Howat, J., Cavanagh, R., Borenstein, S., Deason, J., & Schwartz, L. (2016). Recovery of utility fixed costs: Utility, consumer, environmental, and economist perspectives (No. LBNL-1005742). Lawrence Berkeley National Lab.(LBNL), Berkeley, CA (United States). Retrieved from https://www.osti.gov/biblio/1342757