8.6 Conclusion

In this chapter, we learned about a firm’s profit-maximizing behavior in a perfectly competitive industry. Perfectly competitive industries are characterized by having a large number of price-taking firms that produce identical products and by having few barriers to entry. A perfectly competitive firm maximizes its profits by producing where the market price (the same as marginal revenue in a perfectly competitive market) equals its marginal costs. We saw that a firm’s supply curve is the portion of its marginal cost curve at or above its average cost curve and that individual firms’ supply curves combine to form the market supply curve.

In the real world, most firms have some influence over the market price, and although many industries approach perfect competition, truly perfectly competitive industries are rare. Even so, the profit-maximization framework we developed here will prove useful as a simple foundation on which to build analyses of more complicated market structures. In Chapter 9 and Chapter 10, we look at the type of firm that is most unlike the perfectly competitive firm—the monopoly that sells a unique product on the market. In Chapter 11, we examine firms in monopolistic competition and oligopolies that share some characteristics with both monopolies and perfectly competitive firms.