Profit Maximization in Perfect Competition

Perfectly competitive firms maximize profit by producing where marginal revenue equals marginal

cost. This sounds simple but understanding why reveals powerful economics.

These firms operate in markets with countless buyers and sellers, identical products,

and zero barriers to entry. Because of this, individual firms are price takers,

they cannot control market prices. Their demand curve is perfectly elastic at whatever price

the market sets. This creates a unique situation where marginal revenue always equals price.

Unlike other business models, these firms face a horizontal demand curve.

To find optimal output, firms compare marginal revenue to marginal cost at each production