Profit maximization by a small firm

The Competitive Firm

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This is the classic starting place for building a model of the individual firm. In a perfectly competitive market there is a larger number of small firms, and all firms in each industry compete with each other in an impersonal manner. The owner of each firm has to accept the market price and try to find a level of production that gives him the highest level of profit. However, as it turns out, if there is any profit more producers join in and drive the profits down--ultimately to a point of zero economic profit. Even though there are hardly any examples of perfect competition in the real world, the discussion in this section provides the foundations for a better understanding of the more realistic market scenarios.