Pricing and output decisions focus on where to set the price for the product and how much quantity to supply. A firm will choose to produce the quantity where marginal cost is equal to marginal revenue, or where the marginal cost and marginal revenue curves intersect. However, pricing and output decisions depend on the market structure. In a perfectly competitive market, a firm’s size is too small to impact the prices in a market. In which case, the firm must be a price taker, so it must take the price given and decide how much quantity to supply. In this type of market market, price is equal to the marginal cost of production.
In a monopoly, a monopolist can alter the prices since it is the only provider of a good and possesses the market power. In this case, the monopolist must take the positive and negative effects of a price increase into consideration. Hence, the monopoly makes his decision based on the elasticity of demand to determine the profit maximizing price.
If unit costs rise with output, price-taking firms will only produce more if price increases¹. Price-setting firms will increase prices when they choose to expand output into the range where unit costs are rising¹. If a reduction in output leads to a reduction in unit costs, they will decrease their prices¹. The actions of price-taking and price-setting firms show the variables that must be factored into making pricing and output decisions.
1. Ragan, Chrisopher. Macroeconomics/Christopher T.S. Ragan, Richard G. Lipsey. – 13th Canadian ed.