Equilibrium of a Competitive Firm

The equilibrium of a competitive firm refers to the level of production that enables a firm in a perfectly competitive market to maximize its profits. Generally, to maximize profit, a firm must set its marginal cost (MC) equal to its marginal revenue (MR). In a perfectly competitive market, the firm is a price-taker, meaning the price is dictated by the market. The firm's task is to determine the optimal production level that maximizes its profit. This equilibrium can be depicted in a Cartesian graph as shown below:

The condition where marginal revenue (MR) equals marginal cost (MC) occurs at the point where the market price (P) intersects with the marginal cost (MC). In the case of perfect competition, the firm has no control over the price of the product, only the quantity produced. Therefore, marginal revenue (MR) is the same as the market price (P). Ultimately, the equality P = MC determines the optimal production level for maximizing a competitive firm's profit.