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Posted on April 17th, 2014, by

2 What quantity should the purely competitive firm produce to maximize profits?

From the total revenue and the total cost perspective, the firm should increase its production to widen the gap between the total revenue and the total cost. In fact, the more is total production and sales, the better is for the total revenues of the company, while the total profit equals total revenues minus total costs. Therefore, the wider is the margin between the total revenues and total costs, the better is for the company’s profits. In such a way, the quantity should increase to maximize revenues and the profits will be the highest when the company’s production will reach the maximum quantity, regardless of costs of the production.

In this regard, the marginal revenue and marginal cost perspective offer an alternative approach to the production to maximize profits of the company. In fact, the marginal revenue and marginal costs perspective implies that the maximum profits may be reached when the marginal revenues equal marginal costs. The reason is the change in the total profit which increases along with the rise of marginal revenues and drops with the rise of marginal costs. Therefore, the balance of marginal revenues and marginal costs will bring maximum profits. In this respect, the company should define the quantity which matches the balance point between marginal revenues and marginal costs. Such balance will help to define the quantity of items necessary for the maximum profit of the company.

3 What are the relationship between marginal cost and the supply curve for the purely competitive firm?

The change of the marginal cost will affect the supply curve for the purely competitive firm. The purely competitive firm has to maintain the average costs of production compared to the costs of production in the industry because the competition is tight and the company has to take the price existing in the market instead of making it. Therefore, the rise of the costs will raise the problem of the drop of revenues and profits. However, the marginal cost implies the cost of one more item manufactured by the company. In this regard, the supply curve will depend on the existing demand in the market because the company cannot increase its marginal cost that naturally implies the respective rise of the supply curve since the supply curve mirrors the rise of the marginal cost. The more items is produced the higher will be the curve, the decrease of marginal cost means the decrease of manufacturing and, thus, the drop of the supply curve. Hence, if the marginal cost increases and so does the supply curve, the demand on the items should grow respectively. Otherwise, the company will face the problem of oversupply or have to decrease its price consistently to make customers buying extra-items manufactured as the rise of the marginal cost. Therefore, the purely competitive firm should increase the marginal cost when the market is ready to accept the larger supply of products manufactured by the company since the rise of marginal cost will naturally lead to the rise of the supply curve. In the purely competitive environment, the rapid rise of marginal cost and supply curve is dangerous because the competition is tight and the company may face a risk of failing to sell all its products supplied to the market.

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