Maximizing Profits of a Competitive Market

“A firm in a competitive market, like most other firms in the economy, tries to maximize profit, which equals total revenue minus total cost” (Mankiw, 2011). So for instance say a farm makes certain quantity of milk m, and sells each at the market price y, their revenue would be m x y. If the each milk sells for three dollars a gallon and they sell 500 of them their total revenue would be $1500. The farm is small compared to the market field, so it takes the price that the market has given to them by its conditions. That means that the price of milk is not determined by how much the farmer produces. If they were to double their production of milk then their revenue would also be doubled. “As a result, total revenue is proportional to the amount of output” (Mankiw, 2011). So the main goal of a competitive market is to maximize their profit, which in turn equals their total revenue minus total cost. In the market “as long as marginal revenue exceeds marginal cost, increasing the quantity produced raises profit” (Mankiw, 2011). In the dairy field they use one of the 10 principals of economics that is that rational people think at the margin. The dairy famer can apply this principal by seeing if their “marginal revenue is greater then their marginal cost” (Mankiw, 2011). So if the farmer sees that it is revenue is greater when it sells, a number of gallons of milk, then they should increase their production of milk because it will put more money (revenue) in their pockets then it would take out (cost), but if they make too much and the revenue is less then the cost than they need to decrease the production of it. So if the dairy farmer thinks at the margin at makes gradual adjustments to the production level, this will lead to them gaining the “profit maximizing quantity” (Mankiw, 2011).

Characteristics of