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Explain the Equilibrium of a Competitive Firm.

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The short-run equilibrium of a firm can be easily explained with the help of marginal revenue = marginal cost approach or (MR = MC) rule

Marginal revenue is the change in total revenue that occurs in response to a one unit change in the quantity sold.
Marginal cost is the addition to total cost resulting from the additional of marginal unit.

Since price is given for the competitive firm, the average revenue curve of a price taker firm is identical to the marginal curve. Average revenue (AR) thus is equal to marginal revenue (MR) is equal to price (MR = AR = Price).

According to the marginal revenue and marginal cost approach or (MR = MC) rule, a price taker firm is in equilibrium at a point where marginal revenue (MR) or price is equal to marginal cost. The point where MR = MC = Price, the firm produces the best level of output. From this it may not be concluded that the perfectly competitive firm at the equilibrium level of output (MR = MC = Price) necessarily ensures maximum profit.

marto answered the question on April 16, 2019 at 12:56

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