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How does the price taker maximize profit?

Tag: profit — admin @ 8:41 am

The firm’s output decision is based on comparing benefits with costs. A firm that decides to enter a market will expand its output as long as the benefits (additional revenues) from the production and sales of the additional units exceed their marginal costs. How will changes in output change the firm’s costs? In the preceding posts, we discovered that the firm’s short-run marginal costs will eventually increase as the firm expands its output by working its fixed plant facilities more intensively. The law of diminishing marginal re- turns assures us that this will be the case. Eventually, both the firm’s short-run marginal and average total cost curves will turn upward.
What about the benefits or additional revenues from output expansion? Marginal revenue (MR) is the change in the firm’s total revenue per unit of output. It is the additional revenue derived from the sale of an additional unit of output. Mathematically,
MR = Change in total revemel change in output
Since the price taker sells all units at the same price, its marginal revenue will be equal to the market price.
In the short run, the price taker will expand its output until marginal revenue (price)just equals marginal cost. This decision-making rule will maximize the firm’s profits (or minimize its losses),