The Theory of the Competitive Firm

Note: the first time you go through each of these topics you should click on the following items in sequence. 

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Part "a"
Part "b"

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We are now ready to move on in our study of how producers determine how much to produce, given their costs of production and the way the price of their product is determined in a competitive market.   


  • To understand why competition is a precondition for allocative efficiency in a free-market economy
  • To demonstrate how a perfectly competitive firm is a "price-taker", maximizing profit or minimizing loss by expanding production in the short run to the point where marginal cost equals marginal revenue
  • To show why marginal cost is equal to price at the competitive firm's profit maximizing (or loss minimizing) level of output
  • To introduce the idea of a "normal return" and show how it is related to the process by which competitive firms and the industry they comprise achieve a long term equilibrium position
  • To explain the concept of elasticity of supply
  • To demonstrate how market price is determined by the interaction of demand and supply schedules.

Copyright 1999 K.J. Rea