8.4 : Short-run Profit Maximization I

The concept of profit maximization is fundamental to understanding how firms make decisions. Firms in these markets must accept the market price as it is because of the intense competition of the market and homogeneity of the product.

The Profit Maximization Rule: Profits are maximized when firms produce that quantity where the marginal cost (MC) of producing an additional unit equals the marginal revenue (MR) gained from selling that additional unit.

Marginal Cost (MC): The increase in a firm's total cost from producing one more unit.

Marginal Revenue (MR): The additional income a firm receives from selling one more unit. MR remains constant across all quantities sold when a firm operates under perfect competition.

Take the case of a generic pharmaceutical manufacturer producing a common drug in a perfectly competitive market. The drug maker increases production until the cost of producing an additional pill equals the revenue from its sale. This decision optimizes the firm's profits without influencing the drug's market price.

The delicate balance between marginal cost and marginal revenue is pivotal for firms aiming to maximize profits in a perfectly competitive market.