A competitive firm is a price-taker, able to sell as little or as much as it desires at the going market price. In other words, demand for a competitive firm is perfectly elastic at the going price. Since firms are assumed to maximize profit, the firm’s only choice is how much output, if any, to produce to achieve maximum profit.
|Exploration: What output level will a competitive firm choose to obtain maximum profit?|
The graph shows the average- and marginal-cost curves of a typical competitive firm. Initially, price is $80 and the firm is producing 80 units per week. Its fixed costs are $2700 per week. To use the graph, click and drag the blue triangle on the vertical axis to change the market price, hence the firm’s demand curve. Click and drag the blue triangle on the horizontal axis to change the firm’s choice of output. Cost and profit data are shown in the box at right; clicking on the Show Profit/Loss button will provide a graphical illustration of the firm’s profit or loss: profit in green; losses in red. Clicking the Reset button will restore all initial values.