Economics Perfect Competition Questions Medium
The profit-maximizing output level for a perfectly competitive firm is determined by the point where marginal cost (MC) equals marginal revenue (MR). In perfect competition, firms are price takers, meaning they have no control over the market price and must accept it as given.
To maximize profits, a perfectly competitive firm will produce the quantity of output where the marginal cost of producing an additional unit is equal to the marginal revenue received from selling that unit. At this level of output, the firm is neither overproducing (where MC > MR) nor underproducing (where MC < MR).
In the short run, if the market price is higher than the average variable cost (AVC), the firm will continue to produce as long as the price covers the variable costs. However, in the long run, the firm will only continue to produce if the market price is higher than the average total cost (ATC) to ensure it covers both variable and fixed costs.
Therefore, the profit-maximizing output level for a perfectly competitive firm is where MC = MR, as long as the market price is above the firm's average total cost.