Key Elements a Court Considers in Determining Predatory Pricing:

1. Price Below Average Total Cost (ATC): The most crucial element is demonstrating that the firm is selling its product or service at a price below its average total cost of production. This shows that the firm is not simply making a normal profit.
2. Intent to Monopolize: The court must prove that the firm had the intention of driving competitors out of the market and establishing a monopoly or dominant market position. This can be inferred from the firm's actions, such as advertising campaigns, price statements, and market share gains.
3. Likelihood of Recouping Losses: The firm must have a reasonable prospect of recouping its losses in the future by raising prices after the competitor has been eliminated. This requires evidence that the firm can sustain higher prices in the absence of competition.

Relevant Costs Involved:

• Average Total Cost (ATC): This includes all costs of production, both fixed and variable. It's the total cost divided by the quantity produced.
• Variable Cost (VC): Costs that change with the level of output (e.g., raw materials, wages).
• Fixed Cost (FC): Costs that do not change with the level of output (e.g., rent, depreciation).
• Marginal Cost (MC): The additional cost of producing one more unit. Predatory pricing typically involves selling below MC.

Proof of Predatory Pricing is Difficult: Courts often consider the specific market conditions, the history of pricing in the industry, and the firm's overall business strategy to determine whether predatory pricing is occurring. It's a complex legal issue with significant implications for competition policy.

In a perfectly competitive market, a firm is a price taker. This means the firm has no control over the market price and must accept the prevailing market price. The firm's goal is to maximise profit, given this fixed market price.

The firm determines its profit-maximising level of output by considering the following:

• Total Revenue (TR): TR = Price x Quantity (P x Q). Since the price is fixed, TR is simply the price multiplied by the quantity produced.
• Total Cost (TC): TC is the sum of fixed costs (FC) and variable costs (VC). VC = Total Cost - Fixed Costs.
• Marginal Cost (MC): MC is the derivative of the total cost function.
• Profit Maximisation Rule: The firm will maximise profit by producing the quantity where Marginal Revenue (MR) equals Marginal Cost (MC). In perfect competition, MR = Price. Therefore, the firm maximises profit when P = MC.

The firm's decision-making process differs significantly from that of a monopoly.

In a monopoly, the firm has control over the price it charges. The firm will maximise profit by producing the quantity where MR = MC and then setting the price on the demand curve at that quantity. This leads to a lower output level and a higher price compared to perfect competition. The firm's profit-maximising output in a monopoly is determined by the intersection of its marginal revenue and marginal cost curves, whereas in perfect competition, it is determined by the intersection of the market price and its marginal cost curve.

Calculation:

• Original Quantity Demanded: 500 bags
• New Quantity Demanded: 480 bags
• Percentage Change in Quantity Demanded: ((480 - 500) / 500) * 100 = -4%
• Percentage Change in Price: ((9 - 8) / 8) * 100 = 12.5%
• Price Elasticity of Demand (PED): -4% / 12.5% = -0.32

Explanation:

The PED is -0.32, which is less than 1 (in absolute terms). This indicates that the demand for the organic coffee is inelastic. When the price increases, the quantity demanded falls by a smaller percentage. Therefore, the firm is likely to experience a decrease in total revenue. This is because the decrease in quantity demanded is not proportionally large enough to offset the price increase. The firm is essentially making more money per bag, but selling fewer bags overall.