Final answer:
In perfect competition, firms maximize short-run profits by producing where the marginal cost equals the market price. Changes such as an increase in market price, technological advancements, decreases in input costs, or short-term contracts or orders can lead to an increase in production by a representative firm.
Step-by-step explanation:
To determine the profit-maximizing quantity of a representative firm in perfect competition in the short run, we use the production function Q = ALα, where 0 < α < 1, and the firm pays a wage w for each unit of labor employed. In perfect competition, firms are price takers and will set output where the marginal cost (MC) equals the market price (P), since P = MR (Marginal Revenue) in perfect competition. The first-order condition for profit maximization requires that the marginal cost of production be equal to the market price. Since the function is not directly given in terms of labor, we cannot solve it explicitly without additional information about costs. However, conceptually, the firm maximizes profits by adjusting the level of labor until its marginal cost equals its marginal revenue.
The following are four reasons why this representative firm might increase production (Q) in the short-run:
• Increase in market price: If market demand for the product increases, leading to a higher market price, firms will expand output to where the new price equals marginal cost.
• Technological Advancement: Introduction of better production techniques or equipment may lower the marginal costs, incentivizing firms to increase production.
• Decreases in Input Costs: A reduction in wage rates or other input costs can lead to an increase in production as it reduces the firm's overall costs.
• Short-term Contracts or Orders: If firms receive short-term commitments or orders that guarantee sales at a favorable price, they might scale up their production to meet this temporary boost in demand.