BEHAVIOR OF A COMPETITIVE FIRM

Suppose you operated a perfectly competitive firm and knew your cost and production functions, How much should your firm produce? How much wheat should Farmer Smith produce if wheat sells at $3 per bushel? How much oil should Billy Bob Tucker produce and sell if the market price of oil is $40?

These questions concern the supply behavior of perfectly competitive firms, In this chapter, we will assume that our competitive firm maximizes profits (remember that profits equal total revenues minus total costs). Profit maximization requires that the firm. Manage its internal operations efficiently (prevent waste, encourage worker morale, choose efficient production processes, and so forth) and make sound decisions in the marketplace (buy the correct quantity of inputs at least cost and choose-the ” optimal level of output).

Why would a firm want to maximize profits? Profits are like the net earnings or take-home pay of a corporation. The}’ represent the amount a firm can pay in dividends to the owners, reinvest in new plant and equipment, or employ to make financial investments. All these activities increase the value’ of the firm to its owners, Because profits involve both costs and revenues, the firm must have a good grasp of its cost structure. Turn back to Table 7-3 in the. last chapter to make sure you are clear .on the important concepts of total cost, average cost, and marginal cost.

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