Short-run Profit Maximization I

Profit Maximization is a firm's primary goal. But, in perfect competition, firms cannot manipulate profits because they are price takers.

Instead, they optimize profits by adjusting production levels, following the profit maximization rule. It dictates that firms should produce at a level where marginal cost equals marginal revenue.

Here, marginal cost is the cost of each extra unit produced, while marginal revenue is the income from selling one more unit.

Consider a chair manufacturer operating within a perfectly competitive market.

With increased chair production, the marginal cost per chair rises, forming an upward-sloping MC curve.

However, the marginal revenue remains constant, displaying a horizontal MR curve.

If he stops producing at a point where the revenue from selling an additional chair is higher than its cost, he loses potential profits.

If he continues production where the revenue from the extra chair is less than the chair's cost, continuing production will result in losses.

This suggests that the optimal production level is where MC equals MR.