Explain How a Business Running in an Industry
Supply curve is a graphic representation of the relationship between the good price and the quantity of the good that a seller is able to supply. With the lower price of production, they are able to produce more goods to the market. However, if a business operating in an industry of perfect competition, the firm will face intense competition with in the market. Perfect competition is a market which has many firms sells identical products to many buyers, there are no restrictions on entry into the market and sellers and buyers are well informed about prices. Therefore, by facing perfect competition, Firms are price takers which cannot influence the market price.
In order to maximize economic profit, firms need to increase the revenue and also reduce the cost of production. Since a business is under perfect competition, it is hard for them to raise the price of the goods. Therefore, the marginal revenue is usually being constant (see figure1.0). By reducing the cost is another option to maximize the profit which firms can earn. In order to breakeven, the marginal cost must equal to marginal revenue. The marginal cost is the change in the total cost that arises when the quantity produced change by one unit. The marginal cost usually firstly decrease and increase eventually. (See figure1.1) By having two interceptions, there will be two break-even points. Since a business goal is to maximize economic profit. Therefore a business won’t stop producing goods when they reach the first interception point. They will keep increase the amount of goods they produce in order to maximize the firm’s benefit until they reach the second interception point. After reaching the interception point of marginal revenue and marginal cost, the business is likely to stop producing goods since the price will go up and no one is willing to buy their goods in perfect market competition.