Download Profit Maximization – Perfect Competition

Profit Maximization – Perfect Competition
Perfect competition arises when there are many firms selling a homogeneous
good to many buyers with perfect information. Under perfect competition, a firm is
a price taker of its good since none of the firms can individually influence the price
of the good to be purchased or sold. As the objective of each perfectly competitive
firm, they choose each of their output levels to maximize their profits. 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. If the above competitive firm produces a quantity exceeding qo,
then MR and Po would be less than MC, the firm would incur an economic loss on
the marginal unit, so the firm could increase its profits by decreasing its output until
it reaches qo. If the above competitive firm produces a quantity fewer than qo, then
MR and Po would be greater than MC, the firm would incur profit, but not to its
maximum. Therefore, the firm could increase its profits by increasing its output
until it reaches qo.