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Perfect Competition - firms pricing at marginal cost...whats the point?

if the price of the extra unit to the firm is the same as what they sell the extra unit for, and so they end up making no profits, what the point of producing and staying in the market? are they not just wasting time and resources because theyre making no profit?

Marginal

Firms will make a profit in the short run.

Reply 3

J234

redkopite

if the price of the extra unit to the firm is the same as what they sell the extra unit for, and so they end up making no profits, what the point of producing and staying in the market? are they not just wasting time and resources because theyre making no profit?

Normal profit is the profit necessary for a firm to stay in the market. In (long run) perfect competition, a firm will produce at MC=MR because for any more units above this quantity MC>MR (they will be loss making), and any less than this quantity MC<MR (they will be foregoing extra profit). Therefore, at MC=MR, the firm will maximise its profit, and will make normal profit (i.e the amount of profit necessary to keep them in the market).

Hope that answers your question :smile:

Reply 4

redkopite

OP

14

so basically the term "pricing at marginal cost" means that theyve made profit up to that point, but NOW theyre breaking even and so are not increasing production? For example if mr = mc on the 100th unit, they only break even on 100 units, and have made profit on units 1-99 where mr>mc? is that right?

also when they get to 100 units, do they stop producing? because surely if they produced any more mc>mr? :s

thanks

Reply 5

J234

redkopite

so basically the term "pricing at marginal cost" means that theyve made profit up to that point, but NOW theyre breaking even and so are not increasing production?

Well according to the graph, at MC=MR, there is no profit being made. However, the model has "normal profit" built into the firms costs. This is the minimum level of profit a firm would need in order to stay in the market.

redkopite

For example if mr = mc on the 100th unit, they only break even on 100 units, and have made profit on units 1-99 where mr>mc? is that right?

also when they get to 100 units, do they stop producing? because surely if they produced any more mc>mr? :s

This is just confusing matters unfortunately. They won't make a profit on all of units 1-99 because the AR is not greater than AC, but they will break even on the 100th unit. If anyone knows how to paste a graph it would be really helpful!

Reply 6

redkopite

OP

14

one like this maybe? http://wps.prenhall.com/wps/media/objects/988/1012152/chapter13/13.3.gif

im confused about this concept of "normal profit" does this mean that when the firm is selling it's good, at mr=mc, theyr stil making profit on something else? :s

Reply 7

J234

redkopite

one like this maybe? http://wps.prenhall.com/wps/media/objects/988/1012152/chapter13/13.3.gif

im confused about this concept of "normal profit" does this mean that when the firm is selling it's good, at mr=mc, theyr stil making profit on something else? :s

Normal Profit

Definition
Minimum profit necessary to attract and retain suppliers in a perfectly competitive market (see perfect competition). Only normal profit could be earned in such markets because, if profit was abnormally high, more competitors would appear and drive prices and profit down. If profit was abnormally low, firms would leave the market and the remaining ones would drive the prices and profit up. Markets where suppliers are making normal profits will neither expand nor shrink and will, therefore, be in a state of long-term equilibrium. Normal profit typically equals opportunity cost.

It's a little strange, but just accept that when the graph shows a firm producing at AC=AR (=MC=MR in perfect competition), despite TC-TR=zero profit, the model still states that a firm is acquiring normal profit. These are the profits an entrepreneur wants to be receiving in order to persuade him to keep his business in the market.

NB. yeah graphs like that, but those are for monopolistic competition.

Reply 8

alex_hk90

19

The profits required to stay in the market are contained in the costs to the firm.

Perfect Competition - firms pricing at marginal cost...whats the point?

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