Final answer:
A profit-maximizing firm aims to maximize profits, which occurs where marginal revenue equals marginal cost. In a perfectly competitive market, this is typically where the market price equals the marginal cost. The firm's goal is to find the output level where the difference between total revenue and total costs is the greatest.
Step-by-step explanation:
A profit-maximizing firm chooses the level of output that maximizes the difference between total revenue and total costs, also represented as profit. In the context of a perfectly competitive market, this typically occurs where the marginal revenue, equivalent to the market price, is equal to marginal cost. When a firm produces more, its total revenue increases at a steady rate determined by the market price. Yet, maximum profits are not achieved by simply increasing output indefinitely, but rather by finding that sweet spot where the costs of producing one more unit (marginal cost) equals the additional revenue gained from selling that unit (marginal revenue). For a perfectly competitive firm, reaching maximum profit can be visualized on a graph where the vertical gap between the total revenue and total cost curves is at its greatest, indicating the highest possible profit.
When the market price is above the average cost at the profit-maximizing quantity of output, the firm is making a profit. Conversely, if the market price is below the average cost at this quantity, it indicates that the firm is experiencing losses. An example of this would be a raspberry farm that achieves maximum profit at an output level between 70 and 80 units, where profit equals $90. Losing money at lower or higher levels of output demonstrates that there's a precise output level that optimizes profits.