Sunday, February 7, 2016

Perfectly Competitive (Profit) Profit Max

Profit Max = MR = MC
The goal of the firm is to maximise profits.

In a perfectly competitive firm the Quantity at which the firm should produce is where MR = MC.

Often students can't see it visually how a firm will max profits at the MR = MC point. I created a bit of a graphic to show the relationship between profit and profit max.
Below is profit viewed from a Total Revenue and total cost perspective. 

Notice that if a firm is producing anywhere to the left of profit max they should produce more as there is more profit to be made by producing more units. Producing to the right of profit max is where costs have risen to the point that to produce more lowers overall profits. So the firm should produce less.

Answer - (c) Experience a  decline in profits

How about a Perfectly Competitive graphic with profit curve.

Profit is maximised at the quantity where MR = MC.