Question

How does a perfectly competitive firm calculate total revenue?

Short answer

A perfective competitive firm can only sell a limited number of units.

Step-by-step solution

Definition

A perfectly competitive firm must accept the price prevailing in the market for its output as determined by market forces and it can not choose the price itself.

Explanation

A perfectly competitive firm can only choose the number of units it can sell. It implies that a firm is facing an inelastic demand curve because buyers are willing to purchase output at market price.

The quantity of output a perfectly competitive firm chooses to produce, along with market price, will determine the firm's total revenue. Thus, total revenue is equal to the quantity of output sold times the market price.