In a perfectly competitive market, a firm produces and sells a certain amount of goods. Among the following what reflect the firm's profit?
In a perfectly competitive market, a firm produces and sells a certain amount of goods. Among the following what reflect the firm's profit?
Solution
Option 1 -> This calculates Fixed Cost (FC = TC - VC), not profit.
Option 2 -> This is the fundamental formula for profit: Profit = Total Revenue - Total Cost.
Option 3 -> This is meaningless as it subtracts marginal cost from total variable cost, which doesn't represent any economic measure.
Option 4 -> In perfect competition, Average Revenue equals price, so this calculation doesn't yield profit.
Hence, Option 2: Total Revenue - Total Cost -> Profit is defined as the difference between what a firm earns (Total Revenue) and what it spends (Total Cost). This is the standard profit formula used in all market structures, including perfectly competitive markets. If TR > TC, the firm makes economic profit; if TR = TC, the firm breaks even; if TR < TC, the firm incurs a loss. -> correct
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