What is the Highest Profit Point in a Perfectly Competitive Market?

A perfectly competitive firm can sell as large a quantity as it wishes, as long as it accepts the prevailing market price. The total revenue depends on the quantity sold and the price charged. If the firm sells a higher quantity of output, then total revenue will increase. If the market price of the product increases, then total revenue also increases whatever the quantity of output sold.

The vertical axis shows both total revenue and total costs, measured in dollars. The total cost curve intersects with the vertical axis at a value that shows the level of fixed costs, and then slopes upward.

Based on its total revenue and total cost curves, a perfectly competitive firm can calculate the quantity of output that will provide the highest level of profit. At any given quantity, total revenue minus total cost will equal profit.

One way to determine the most profitable quantity to produce is to see at what quantity total revenue exceeds total cost by the largest amount.

A higher price would mean that total revenue would be higher for every quantity sold. A lower price would mean that total revenue would be lower for every quantity sold. What happens if the price drops low enough so that the total revenue line is completely below the total cost curve; that is, at every level of output, total costs are higher than total revenues? In this instance, the best the firm can do is to suffer losses. However, a profit-maximizing firm will prefer the quantity of output where total revenues come closest to total costs and thus where the losses are smallest.