9.3 Short-Run Decisions LO 3, 4
Any profit-maximizing firm will produce at a level of output at which
(a) price is at least as great as average variable cost and (b) marginal
cost equals marginal revenue.
In perfect competition, firms are price takers, so marginal revenue is
equal to price. Thus, a profit-maximizing competitive firm chooses its
output so that its marginal cost equals the market price.
Under perfect competition, each firm’s short-run supply curve is
identical to its marginal cost curve above the minimum of average
variable cost. The perfectly competitive industry’s short-run supply
curve is the horizontal sum of the supply curves of the individual
firms.
In short-run equilibrium, each firm is maximizing its profits.
However, any firm may be making losses, making profits, or just
breaking even.