In a perfectly competitive market all producers are price-
There are two necessary conditions for a perfectly competitive industry: there are many producers, none of whom have a large market share, and the industry produces a standardized product or commodity—
The marginal benefit of a good or service is the additional benefit derived from producing one more unit of that good or service. The principle of marginal analysis says that the optimal amount of an activity is the level at which marginal benefit equals marginal cost.
A producer chooses output according to the optimal output rule: produce the quantity at which marginal revenue equals marginal cost. For a price-
Companies should base decisions on economic profit, which takes into account explicit costs that involve an actual outlay of cash as well as implicit costs that do not require an outlay of cash, but are measured by the value, in dollar terms, of benefits that are forgone. The accounting profit is often considerably larger than the economic profit because it includes only explicit costs and depreciation, not implicit costs.
A firm is profitable if total revenue exceeds total cost or, equivalently, if the market price exceeds its break-
Like sunk cost, fixed cost is irrelevant to the firm’s optimal short-
Fixed cost matters over time. If the market price is below minimum average total cost for an extended period of time, firms will exit the industry in the long run. If above, existing firms are profitable and new firms will enter the industry in the long run.
The industry supply curve depends on the time period. The short-
The long-
In the long-