Figure 9-4 Profit Maximization for a Competitive Firm
(in Figure 9-2 ) that for price-taking firms, marginal revenue is equal to
the market price. Combining these two results gives us an important
conclusion:
A profit-maximizing firm that is operating in a perfectly competitive market will produce the
output that equates its marginal cost of production with the market price of its product (as
long as price exceeds average variable cost).If you look back to Table 9-1 , when the market price is $5 the
application of this rule is evident after doing a few calculations. Since
price is $5, and the firm is a price taker, the firm’s MR is also $5. If you
compute the firm’s MC between output levels and you
see that the firm’s Thus, the
highlighted row, which indicates the firm’s maximum profits (or
minimum losses), also shows the level of output where
In a perfectly competitive industry, the market forces of demand and
supply determine the price at which the firm sells its product. The firm
then picks the quantity of output that maximizes its own profits. We have
seen that this is the output for which price equals marginal cost. When
the firm has reached a position in which its profits are maximized, it has
no incentive to change its output. Therefore, unless prices or costs
change, the firm will continue to produce this output because it is doing
as well as it can do, given the market situation. This profit-maximizing
behaviour is illustrated in Figure 9-4.
Q= 60 Q= 80 ,
MC=ΔTC/ΔQ=$ 100 / 20 =$5.MR=MC.