In a perfect competition, there are many buyers and sellers of homogeneous products, and there is free entry and exit in the market.
Why is profit maximizing important?
- This simply means that, in a perfectly competitive market, there are many buyers and sellers (price takers) of homogeneous products (standardized products with substitute) and the market is free (practically open) to all individuals or business entities that are willing to trade all their goods and services.
- In a perfectly competitive market in long-run equilibrium, a long-run equilibrium avails firms the opportunity to adjust all inputs and all fixed costs are maximized. Also, it's characterized by free entry and exit, as such there isn't a fixed number of firms..
- However, the firms always strive to maximize profits by increasing their level of output, such that P = MC. Also, the firms wouldn't be willing to leave or enter into the market because they are not making any profit, such that P=AC.
- In a nutshell, in the long run equilibrium P=MR=MC and P=AC.
- Hence, if price is greater than average variable cost and less than average total cost at the profit-maximizing quantity of output in the short run, a perfectly competitive firm will produce at an economic loss.
- Additionally, Average Total Cost (ATC) can be defined as the overall cost of production divided by total output of production. It is calculated by dividing total cost by total output of production or by adding TVC and TFC.
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