a) Explain how does the price faced by a profit-maximizing competitive firm compare to

its marginal cost?

Perfect competition is a market in which many firms sell identical products to
many buyers which there are no restrictions on entry into the market, established
firms have no advantage over new ones and sellers and buyers are well informed
about prices. In perfect competition, each firm produces a good that has no unique
characteristics, so consumers do not care which firms good they buy. Plus, firms in
perfect competition are price takers. A price taker is a firm that cannot influence the
market price because its production is an insignificant part of the total market.
In perfect competition, the price of output is the same for every unit of output.
In fact, there is only one price level for the whole market, which is the market price
and all firms have to follow this market price. Profit is the difference between revenue
and cost, thus it expressed as follows: Profit , =TRTC .To find the profitmaximising output is to use marginal analysis, which compares marginal revenue,
MR, with marginal cost, MC and marginal cost is increasing.
Quantity
(Q)
7
8
9
10
11

Total
revenue
(TR)
175
200
225
250
275

Marginal
revenue
( MR)
25
25
25
25
25

Total cost
(TC)

Marginal
cost
(MC)

141
160
183
210
245

19
23
27
35

Economic
profit
(TR-TC)
34
40
42
40
30

If marginal revenue exceeds marginal costs (MR > MC ), then the revenue from
selling one more unit exceeds the cost of producing it and an increase economic
profit. Figures 1.0 illustrates these proportions. If Campus Jaya increases its output
from 8 shirts to 9 shirts a day, marginal revenue (RM25) exceeds marginal costs
(RM23), so by producing the 9th shirts economic profit increases by RM 2 from RM40
to RM42 a day. The blue area in the figure shows the increase in economic profit
when a firm increases production from 8 to 9 shirts per day.

If marginal revenue is less than marginal cost ( MR < MC ), then the revenue
from selling one more unit is less than the cost of producing that unit and an increase
in output decreasing economic profit. Figures 1.1 illustrates these proportions. If
Campus Jaya increases its output from 9 shirts to 10 shirts a day, marginal revenue
(RM25) is less than marginal cost (RM27), so by producing the 10th shirts, economic
profit decreases. The table shows that economic profit decreases from RM 42 to
RM40 a day. The green area in the figure shows the economic loss that arises from
increasing production from 9 to 10 shirts a day.

If marginal revenue equal marginal cost ( MR = MC ), then the revenue from

selling one more unit equals the cost incurred to produce that unit. Economic profit is
maximized and either an increase or a decrease in output decreases economic profit.
Campus Jaya maximizes economic profit by producing 9 shirts a day, the quantity at
which marginal revenue equals marginal costs.
A firms profit-maximizing output is its quantity supplied at the market price.
The quantity supplied at a price of RM25 a shirts is 9 shirts a day. If the price were
higher than RM25 a shirts, the firm would increase production. If the price were lower
than RM25 a shirts, the firm would decrease the production.