The profit of a price-taking business is maximized by generating as much output as the market price equals the marginal cost of the final unit produced. The marginal revenue of a price-taking company is the same as the market price. A price-taking firm's activities cannot impact the market price. Because it is unable to reduce the market price, it always accepts it as is. Therefore, the marginal revenue is not equal to the market price.

Because price equals average revenue whenever every unit is sold for the same price, the horizontal line with the height of the market price shows the perfectly competitive firm's demand, marginal revenue, and average revenue—the average amount of revenue taken in per unit. At point E, the marginal cost curve intersects the marginal revenue curve.

A firm's total cost includes both the implicit cost (benefits forgone in the next best use of the firm's resources) and the explicit cost (real cash outlays) when calculating economic profit. Accounting profit, on the other hand, is profit determined only on the basis of the firm's explicit costs.

To see how these curves can be used to decide whether production is profitable or unprofitable, recall that profit is equal to total revenue minus total cost, TR − TC. This means:

• If the firm produces a quantity at which TR > TC, the firm is profitable.

• If the firm produces a quantity at which TR = TC, the firm breaks even.

• If the firm produces a quantity at which TR < TC, the firm incurs a loss.

We can also express this idea in terms of revenue and cost per unit of output. If we divide profit by the number of units of output, Q, we obtain the following expression for profit per unit of output:

• Profit/Q = TR/Q − TC/Q

In summary, a business will maximize profit in the short run by creating the quantity of output at which MC = MR. A price-taker is a completely competitive business that can sell as many units of production as it wants at the market price. This indicates that MR = P is always true for a fully competitive company. As long as the market price is more than that, the company is profitable or breaks even.

• The term, break-even price, refers to The minimum average total cost of a price-taking firm is called its break-even price, the price at which it earns zero economic profit (which we now know as a normal profit).

When the market price is above the break-even price, a company will profit, and when the market price is below the break-even price, it will lose money.

The reason for this is that total cost includes fixed costs, which are costs that are constant regardless of the quantity of product generated and can only be changed in the long term. Regardless of whether a business produces or not, fixed costs must be paid in the near run.

When the market price falls below the firm's minimum average variable cost, the price it obtains per unit does not cover its variable costs. In this case, a company's production should be halted immediately.

Although fixed costs cannot be changed in the short term, companies may buy or dispose of machinery, buildings, and other assets over time. The level of fixed cost is a question of choice in the long term, and a business will pick the level of fixed cost that minimizes the average total cost for the targeted production level.

A company may always eliminate fixed costs by selling off its plant and equipment in the long term. Of course, if it does so, it will be unable to create any product and will have left the sector. A new business, on the other hand, can incur a fixed cost by purchasing equipment and other resources, putting it in a position to produce—it can enter the sector.

Although the set of businesses in almost perfectly competitive sectors is stable in the short run, it varies over time as some firms enter or depart the field.

If the price is high enough to make a profit for existing manufacturers, it will also entice some of these newcomers to join the business. As a result, a price of more than $14 should lead to the entrance in the long run: The organic tomato sector will see new producers.

By producing the amount that equalizes price and marginal cost, a perfectly competitive company maximizes profit or minimizes loss. The only exception is if the price is less than the minimum average variable cost in the short term or less than the minimum average total cost in the long run, in which case the company should shut down.

The industry supply curve is the same as the supply curve or market supply curve that we discussed in previous sections. However, we take extra precautions to distinguish between the supply curve of a single business and the supply curve of the whole industry.

For the short and long runs, the industry supply curve must be evaluated in somewhat different ways.

The industrial supply curve will move to the right in the immediate term. As a result, the market equilibrium will be disrupted, resulting in a lower market price. Existing farms will reduce their output in response to the lower market price, but the total industry output will grow due to the increased number of farms in the sector.

Even the long-run industrial supply curve slopes upward in an increasing-cost sector. The most common cause for this is that manufacturers must utilize a considerable volume of a scarce input (that is, their supply is at least somewhat inelastic). As the industry grows, the cost of that input rises.

As a result, firm cost structures become more expensive than they were when the sector was smaller. The cotton garment business, for example, is expanding, which might raise the price of cotton.