The assumptions of the model of perfect competition ensure that every decision maker is a price taker—the interaction of demand and supply in the market determines price. Although most firms in real markets have some control over their prices, the model of perfect competition suggests how changes in demand or in production cost will affect price and output in a wide range of real-world cases. Show A firm in perfect competition maximizes profit in the short run by producing an output level at which marginal revenue equals marginal cost, provided marginal revenue is at least as great as the minimum value of average variable cost. For a perfectly competitive firm, marginal revenue equals price and average revenue. This implies that the firm’s marginal cost curve is its short-run supply curve for values greater than average variable cost. If price drops below average variable cost, the firm shuts down. If firms in an industry are earning economic profit, entry by new firms will drive price down until economic profit achieves its long-run equilibrium value of zero. If firms are suffering economic losses, exit by existing firms will continue until price rises to eliminate the losses and economic profits are zero. A long-run equilibrium may be changed by a change in demand or in production cost, which would affect supply. The adjustment to the change in the short run is likely to result in economic profits or losses; these will be eliminated in the long run by entry or by exit. Concept Problems
Numerical Problems
ReferencesBuckley, W. F., “Carey Took on ‘Greed’ as His Battle Cry,” The Gazette, 22 August 1997, News 7 (a Universal Press Syndicate column). How does a perfectly competitive firm maximize profit?The key goal for a perfectly competitive firm in maximizing its profits is to calculate the optimal level of output at which its Marginal Cost (MC) = Market Price (P). As shown in the graph above, the profit maximization point is where MC intersects with MR or P.
How does a perfectly competitive firm maximize profit quizlet?The perfectly competitive firm will maximize profits at the level of output where marginal revenue equals marginal cost. In perfect competition, where the firm faces a horizontal demand curve, price is constant and is equal to marginal revenue.
How does a firm in perfect competition maximize profits in the short run?To maximize short run profits, the firm selects a level of output where marginal revenue, MR, equals short-run marginal cost. “A competitive firm produces a quantity where price equals short-run marginal cost, and marginal cost is rising.”
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