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With the aid of a graph,show the short run profit maximizing position of a purely competitive firm.

With the aid of a graph,show the short run profit maximizing position of a purely competitive firm.

Answers

Martin
firm in the short run earns abnormal profits when at the best level of output, the market price exceeds the short run average total cost (SATC). The short run profit maximizing position of a purely competitive firm is explained with the help of a diagram

graph.png

output is measured along OX axis and revenue / cost on OY axis. We assume here that the market price is equal to OP. A price taker firm has to sell its entire output at this prevailing market price i.e. OP. The firm is in equilibrium at point L. Where MC = MR. The inter section of MC and MR determine the quantity of the good the firm will produce.

After having determined the quantity, drop a vertical line down to the horizontal axis and see what the average total cost (ATC) is at that output level (point N). The competitive firm will produce ON quantity of output and sell at market price OP. The total revenue of the firm at the best level of output ON is equal to OPLN. Whereas the total cost of producing ON quantity of output is equal to OKMN. The firm is earning supernormal profits equal to the shaded rectangle KPLM. The per unit profit is indicated by the distance LM or PK.

It may here be noted that a firm would not produce more than ON units because producing another unit adds more to the cost than the firm would receive from the sale of the unit (MC > MR). The firm would not stop short of ON output because producing another unit adds more to the revenue than to cost (MR > MC). Hence, ON is the best level of output where profit of the firm is maximum
marto answered the question on April 16, 2019 at 13:02

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