Competitive Markets

When an impeccably competitive firm is currently maximizing profits, and the prices of raw materials used in production increase, there are certain initial market effects that arise. A firm’s main goal in productivity is to maximize profits. The perfectly competitive firm will continue producing the profit maximizing quantity as long as it is equal to the marginal revenue and the marginal cost (Carbaugh 120).

This firm will continue producing by moving high and low alongside the bordering cost curve (Carbaugh 120). This is because the marginal price curve is confidently slanted because of the law of diminishing marginal returns that also relates to the supply curve of the firm. Any firm that operates as perfectly competitive firms in such industries have positively sloped marginal cost curves. A perfectly competitive firm has the characteristic of achieving its success based on the equality that exists between the price and marginal revenue (Carbaugh 120).

An increase in the value of raw materials aids the profit maximizing quantity to move to a higher level on the marginal cost curve that is positively sloped. This means that the firm will achieve a larger production quantity. On the other hand, when there is a decrease in terms of the price, the firm will move the profit maximizing quantity into a lower level on the marginal cost curve that is positively sloped and effect a smaller quantity of production (Carbaugh 120).

In the end, the equilibrium of a perfectly competitive firm adjusts so that the firm produces at the lowest level in terms of its long-run average cost curve. This means that it will be the firm’s minimum efficient scale. The increase in the price of raw materials will mean that the firm fails to satisfy the fact that prices are similar to average revenue and marginal revenue and will not hold it in the long-run equilibrium.

Work Cited

Carbaugh, Robert J. Contemporary Economics: An Applications Approach. New York: M.E. Sharpe, 2010. Print.