Chapter fourteen: Firms in Competitive Markets
The goal of a firm in a perfectly competitive market is to maximize profit. If a firm is profit-maximizing, it will operate at a point where price equals marginal cost (P=MC). This is because in a perfectly competitive market, firms are price-takers. Therefore they really can't set their prices higher than the point where P=MC or they are likely to have no business.
At the point of profit-maximization, price also equals marginal revenue (P=MR). And marginal revenue equals marginal cost (MR=MC), hence the two are interchangeable in relation to price under these circumstances. Because a firm in a perfectly competitive market tries to operate at the point where MR=MC, it is understandable that if MR is greater than MC, the firm can increase production and it will result in an increase in profit.
From what I have read, there seems to be no actual perfectly competitive firm. I suppose what I think would come close is something like the corn industry. This is because there are a large number of buyers and sellers, the goods being offered are identical, and I don't think there are any barriers to entry or exit of the market.
I guess it doesn't suprise me that there are no firms considered to be perfectly competitive. It seems like it would be near impossible to operate under these conditions 100% of the time!
That's all for now...
Ciao!
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