![]() ![]() To illustrate the concept of profit maximization, consider again the example of the firm that produces a single good using only two inputs, labor and capital. Profits are therefore maximized when the firm chooses the level of output where its marginal revenue equals its marginal cost. When marginal revenue is below marginal cost, the firm is losing money, and consequently, it must reduce its output. When marginal revenue exceeds marginal cost, the firm can earn greater profits by increasing its output. A firm maximizes its profits by choosing to supply the level of output where its marginal revenue equals its marginal cost. Hence, in a perfectly competitive market, the firm's marginal revenue is just equal to the market price, P. If a firm in a perfectly competitive market increases its output by 1 unit, it increases its total revenue by P × 1 = P. If a firm decides to supply the amount Q of output and the price in the perfectly competitive market is P, the firm's total revenue is A firm's marginal revenue is the dollar amount by which its total revenue changes in response to a 1-unit change in the firm's output. ![]() The dollar amount that the firm earns from sales of its output. The firm's profits are the difference between its total revenues and total costs. The costs of production are determined by the technology the firm uses. Consumer demand determines the price at which a perfectly competitive firm may sell its output. In determining how much output to supply, the firm's objective is to maximize profits subject to two constraints: the consumers' demand for the firm's product and the firm's costs of production. Labor Demand and Supply in a Perfectly Competitive Market.Equilibrium in a Perfectly Competitive Market.Monopolistic Competition in the Long-run.Demand in a Perfectly Competitive Market.Classical and Keynesian Theories: Output, Employment.
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