- Why does a perfectly competitive firm maximize revenues where P=MC?
- Why is P=MR in this market type?
- Name a business you think belongs in this category. Why? Be sure you think and write about all of the assumptions about firms in this industry.
Competitive firms maximize revenues where P=MC because when Price (P) is equal to Marginal Costs (MC) then a firms profit is near zero. This is an equilibrium where firms are not entering nor leaving this market due to demand and supply. Once the price goes higher than Marginal Costs firms will want to enter this market to compete, which will lead to prices falling due to supply increases, back to an equilibrium level. If the price is lower than the marginal costs, firms will lose money and choose to eventually exit this market. Lower supply leads to a rise in prices back to the equilibrium level. Due to the law of diminishing returns, marginal costs go up as more quantity is produced. Since this is a perfectly competitive firm it is a price taker in this market.
Price = Marginal Revenue, If Marginal Revenue (Price) is higher than the Marginal Costs, than this firm will produce and gain a profit. Once the Price breaks above the Marginal Costs, the firm may shut down because they will be losing money at that quantity. A rational firm that is trying to maximize profits will only produce the quantity of units that matches where the marginal costs meet the marginal revenue. Since this is a perfectly competitive firm it is a price taker to this market so the market is setting the price. It is competitive meaning all firms are comparable on their marginal costs. So no one firm has any technological or process advantage.
I think most firms that are not monopolies fit into this category. Some companies, especially in the tech industry, seem to have monopolies. Google, Apple, Microsoft, Facebook, and Amazon are some that come to mind. They exist in a world that used to be full of disruptors, but they have been buying them all up. Competing against those giants is challenging for new software companies. They all seem to be in positions to gain great profits for years to come.
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