Suppy Behavior/Decisions of Firm in Competitive Markets

Economics Revision Article

Assumptions

In perfectly competitive market, any one firm is so small relative to the market that it cannot affect the market price.

The firm will maximize profits. To maximize profits, the firm has to choose goods to produce, select production processes, determine output levels, buy inputs, manage its operations and make many other decisions so that they contribute to that objective. This means, the firm to maximize profits, must manage its internal operations and external activities. In internal operations it has to choose efficient production processes, encourage work morale and prevent waste. In external transactions it has to buy the correct quantities of inputs at least cost and manage transport etc., to get the materials to its production facility and transport materials to it customers at least cost. Profits increase the value of the firm to its owners.

Perfect Competition Demand Curve

For any single firm, the demand curve appears to be an horizontal line. At a single price, the firm can sell the maximum quantity that it can produce at that price. At a higher price, the demand will drop to zero.

The Production Quantity Decision by the Firm

Under perfect competition, a profit maximizing firm will set its production at that level where marginal cost equals price.

Economics of Competitive Markets or Perfect Competition
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