Profit Maximization in a Perfect Competition
Firms operate in a perfect competition where marginal costs are high and ensure they make maximum profit by ensuring that marginal costs involved in production equate with marginal revenue generated. Marginal revenue in a firm that is perfectly competitive is taken to be the market price where there is the intersection between demand and supply curves. For firms to be operational, they must interact and relate well with customers and other firms. This interaction can only be possible in the marketplace where buyers and sellers meet to exchange goods and services.
In perfect competition, many firms sell homogenous products and there are many buyers who purchase goods that satisfy their needs. Entering and exiting the market is free and new entrants into the market can not be taken advantage of or be exploited. Everybody is free to carry on business without incurring transaction costs and externalities do not exist. There is sufficient information available about the market and firms do not influence the price of selling goods either by raising or lowering it but only act as price takers. (Vanier, 2003 pp26-29)
Evaluating How It Possible That A Firm In A Perfectly Competitive Market Can Sell All Its Wants Without Having To Change The Price
Every moment, there must be a certain price in the market that will be paid for the goods sold. The price set does not depend on the firm selling it or the person buying it because the price depends on the willingness and ability of buyers to purchase it and the amount of the product supplied. In a perfectly competitive market, a firm accepts the price set in the market and decides on the quantity to be supplied so that profits can be maximized and losses reduced. If the firm finds that, the price is maximizing profits, it decides to sell all wants at the set price without changing it.
Firms in perfectly competitive markets can make a sale without changing price if the price offered is at a break-even point because, at break-even point, a firm will make sales and no money will be lost. The prices are higher than break-even price help the firm to make a profit when decisions are made properly. Marginal costs are the cost incurred by firms when more of the units of products are produced. When marginal costs decrease, production is increased and firms will get higher returns from production. This helps the firm to sell all the wants in the market because there are chances of making huge profits. After all, the cost of production will always be lower than the revenue obtained. (Scherer, 2007 pp12-16)
When the firm produces goods that satisfy consumer tastes and preferences, there is no need to change the price by lowering it to increase demand because, once the good satisfies the taste and preference of consumers, more of it will be purchased and the seller will be able to sell all the goods he offered for sale. If there are no expectations of prices of similar goods to change in the future, firms will sell goods that are currently available in the markets at the already existing market price and potential customers will not hesitate to pay for the goods provided the income available is enough to make their purchases.
The government through the fiscal policy imposes a tax on the goods produced. If the taxes are held constant, firms will be able to sell their products in the market without changing the price because; their profit margin will not be affected by payment of extra tax which means an extra cost. All the wants will be sold at a satisfactory cost because in the end no extra money from the proceeds will be used to pay extra tax. (Farrell, 2004 pp34-39)
References
Vanier D. (2003): Market Structures: Oxford University Press, pp. 26-29.
Farrell J. (2004): The economics of information technology: High technology industries, pp. 34-39.
Scherer F. (2007): Economic performance and industrial market structure: Snippet view, pp. 12-16.