Price Taking Firms' Response To Price Change

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cost and variable cost, combined, equal the total cost of production. Thus, a profit maximizing, price taking firm with relatively variable costs of production, according to the traditional economic model, will raise its production as prices rise. It will also be able to more easily meet its fixed costs. In other words, the higher the price the firm can hope to gain from its goods, all other factors being relatively equal, the more products it will be willing to make, unless it is very costly for the firm to increase the volume of its goods.
In contrast, if prices are going down, the firm will be less willing to sell more goods. It will decrease production because it will have less money from its prices to manufacture its goods, and to reduce its variable costs as a kind of 'damage control.' It will also attempt to sell the goods building up in its warehouses for less money, to reduce losses. In terms of an equation, a profit-maximizing firm, sets quantity at the point that ...

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