I’m reading through Elans 11th hour which says that In perfect competition, A firm charges a price that is equal to its marginal cost. Wouldn’t this mean that the firms would take an economic loss, as it isn’t recovering its fixed costs. Isn’t a firm in perfect competition supposed to make a normal profit? I’m confused! Any explanations would be appreciated!
firstly all firms in perfect competition are price TAKERS ie don’t set the price themselves. They choose to produce at the level where price = marginal cost. ie the cost of producing one more unit is the same as the revenue they get from it. Whether or not they make profits depends on whether the price is above or below their average costs. You are right, in the long run they will make normal profits ie price will equal marginal cost. Hope that helps
Thanks. That clears things up!
Sorry in my previous post I meant to write, normal profits is where price = AVERAGE cost. It’s been a long day 