Loz
A perfectly competitive firm contains many buyers and sellers and the goods are basically the same or almost perfect substitutes of one another. The price of products in perfect competition always equals the average total cost of the good in the economy and total revenue is relative to the amount of output produced.
In a perfectly competitive situation, individual firms have no control over price, as there are so many different companies selling largely the same product, so if one company decided to increase their price, consumers would simply buy the less expensive and identical product of the competitor.
In the short term, as you can’t ignore fixed costs, the only way to maximize profits is to produce the right quantity of the good that makes marginal revenue and marginal costs entirely equal. In the short term, a company’s supply curve is its marginal-cost curve. The market price is equal to the total revenue and marginal revenue, if marginal revenue is equal to marginal cost, the firm is maximizing its profits. If marginal revenue is greater than marginal cost, the company will continue to increase profit by raising production, however they will need to decrease production if marginal revenue becomes less than their marginal cost. Ultimately if the amount of supply the firm produces is below the average-variable-cost curve (AVG), it is better to shut down the business temporarily and only pay your fixed costs, such as wages, electricity etc.
They will naturally lead to producing the profit-maximizing quantity of output
Total revenue – total cost = maximizing profit
• The assumptions underlying the competitive market;
• The nature of the competitive firm (D=P=MR=AR);
• The profit maximizing position for the competitive firm (MR=MC);
• Long-run adjustments of the competitive firm and market.
In perfect competition, total revenue is proportional to the amount of output
TR = P X Q...
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