In perfectly competitive markets, there are large $ numbers of well-informed buyers = and sellers. Perfectly competitive firms sell homogeneous products and can exit or enter the industry. A perfectly competitive firm is a price taker. It has control over price and consequently has to take price as a given, but it can sell that it wants at the going market price. The demand curve for a perfect competitor is perfectly inelastic = at the going market price. The demand curve is also the perfect competitor's marginal = revenue curve because marginal = revenue is defined as the change in total revenue due to a one-unit change in output. Profit is maximized at the rate of output at which the positive difference between marginal = revenues and marginal = costs is the greatest. This is the same level of output at which revenue equals total = cost. The perfectly competitive firm produces at an output rate at which marginal cost equals the price = per unit of output, because MR is always equal to P. Consider the graph below. The area of the shaded rectangle displays hourly economic profits. What prevents this firm from continuing to produce the same number of units per hour but raising the price that it charges for each unit in order to enlarge the area of the profit rectangle? Price and Marginal Cost :3 per LJF'IIU |' I ' 1 1 I I' 1 I I b' r 8 9 10 11 12 13 14 (units per hour] Answer: This firm is perfectly competitive , so its product is ndistingpishable 3 from the products of all other firms in the market. Thus, if the firm were to raise its price above the market clearing price of $8 per unit, few 3 of its customers would substitute away from its product in favor of the ident'ca v products provided by other firms at the $8-per-unit market clearing price, and the firm's profits would fall