Final answer:
In the short run, perfectly competitive firms maximize profit by producing the quantity of output where marginal revenue equals marginal cost, which is when the difference between total revenue and total costs is greatest. If the market price is above average cost at this point, the firm profits; below it, the firm incurs losses.
Step-by-step explanation:
Short Run Profit Maximization in Perfectly Competitive Markets
In the short run, perfectly competitive firms focus on determining the optimal quantity of output to maximize their profits or minimize losses. The concept of short run in this context refers to a period where firms operate with at least one fixed input and bear fixed costs. In such markets, total revenue rises at a constant rate as the firm increases output—driven by the market-determined price.
Profit maximization occurs at the point where the difference between total revenue and total costs is greatest. This is also the point where marginal revenue, equal to the price in perfectly competitive markets, is the same as marginal cost. If the market price is above the average cost at this profit-maximizing output level, the firm will earn profits. Conversely, if the market price is below the average cost, the firm will sustain losses.
Therefore, to achieve profit maximization or loss minimization in the short run, a perfectly competitive firm needs to carefully analyze and produce at a level where its marginal cost is equal to the market price. This ensures that each additional unit of output contributes maximally to the firm's profitability while taking into account the fixed costs involved in production.