Final answer:
Under perfect competition, firms maximize profits at the point where MR = MC, and in the long run, no firm makes economic profits as P = MR = MC = AC. A perfectly competitive firm in disequilibrium with MR > MC has not reached profit maximization, prompting more production until equilibrium is restored.
Step-by-step explanation:
In a perfectly competitive market, firms are price takers and maximize profits where marginal revenue (MR) equals marginal cost (MC). However, because MR is equal to price (P) under perfect competition, a scenario where MR > MC would imply that the firm has not reached the equilibrium output yet, prompting the firm to expand production until MR = MC to maximize profits.
Understanding the equilibrium of a firm under perfect competition requires acknowledgment of the long-run dynamics where firms earn zero economic profits. This is because any short-run profits attract new firms, increasing supply and pushing the price down until P = MR = MC = Average Cost (AC), bringing profits back to zero and restoring long-run equilibrium.
In contrast, a monopolistically competitive firm sets MR = MC but can still have MR > P because it faces a downward-sloping demand curve. This results in a higher price and lower quantity compared to perfect competition, demonstrating allocative inefficiency as the firm produces less than the socially optimal quantity, where the benefit to society is equal to the cost.