Final answer:
Inventory from a fully sold production line is sold at market price, which includes costs of production and desired profit. Firms in perfect competition cannot set their own prices but sell at the market rate, where profits are highest when marginal revenue equals marginal cost.
Step-by-step explanation:
When a production line has sold all of its capacity, the inventory produced from that line is sold at the market price that equals the cost of production and the desired profit. For a perfectly competitive firm, the price is determined by the market demand and supply, and the firm cannot choose the price it charges. This results in a situation where the firm faces a perfectly elastic demand curve for its product. Therefore, any quantity produced is sold at the market price. Economies of scale play a significant role in reducing the cost per unit as the quantity of output increases, which is beneficial especially when a firm is operating at or near full capacity, as indicated by the potential GDP or full-employment GDP.
When considering the quantity supplied, the business must look at various factors, including production possibilities, opportunity costs, and the aggregate supply curve. This is especially true when deciding on the scale of production to optimize economies of scale. Production possibilities curves can illustrate the trade-offs between producing different products. At the maximum output level, increasing prices won't lead to higher outputs since all resources like labor and machinery are fully employed.
Profits are maximized when total revenues exceed total costs by the largest margin. This is achieved when marginal revenue, equal to the price for a perfectly competitive firm, meets marginal cost. If the market price exceeds the average cost at the optimum output level, the firm makes a profit. Conversely, if the market price is below the average cost, the firm incurs losses.