Pure Competition & Monopolistic Competition Research Paper

Pure Competition & Monopolistic Competition - Research Paper Example A firm in a perfect competition shows complete elasticity to price fluctuations. Also, marginal revenues are equals to average revenues and market demands. It is the demand which causes shifts in average and marginal revenues in the short-run. Changes in market demand and supply lead to price fluctuations (Reynolds). 2.3Profit Maximization in the Short-Run For a firm in a pure competition, the difference between total costs and total revenues represent profits. For a firm to earn maximum profits, ability to control and react to marginal costs and revenue functions is important. If a firm can identify the level where marginal costs (MC) can be equals to marginal revenues (MR), profit can be maximized by increasing the output and number of units sold. It is important to note that in a short-run, Average revenue (AR) is equals to marginal revenue (MR) which also represents market price. Furthermore, the firm is intended to increase profits and not revenues. Therefore, a firm is required to produce and sell additional goods in order to reduce marginal costs (MC). The lower marginal cost would lead to lower average costs and the difference between average costs and revenues would indicate final profits of the firm. In short, if marginal costs (MC) are equals to marginal revenues, the firm is earning maximum profits. In a scenario where these two variables are equal or MR is higher than MC, the firm should produce more and vice versa (see Fig 1). In a short-run, the maximum loss that a firm can bear is its fixed cost.