Final answer:
Economic theory assumes that firms aim to maximize profits by efficiently using scarce resources to gain maximum benefit from production and trade. They achieve this through marginal analysis, adjusting production to equate marginal revenue with marginal cost. In competitive markets, profits tend to attract competition, resulting in long-term zero economic profits. b.providing a minimum return on
Step-by-step explanation:
The assumption that firms focus on maximizing gains and minimizing losses is fundamental to economic theory. This implies that firms aim to operate as efficiently as possible, making the best use of their scarce resources to maximize the potential benefits they can derive. Efficiency in economics entails producing and consuming the optimal amount of goods and services, ensuring that all possible gains from trade are realized.
Firms may lack the data to draw an accurate total cost curve for varying levels of production. Consequently, they experiment by adjusting production levels and observing the effects on their profits. This experimentation focuses on how changes in production impact marginal revenue and marginal cost. Marginal analysis helps firms in maximizing profits, which involves determining the production level at which marginal revenue equals marginal cost.
In a monopolistically competitive market, firms that earn economic profits can attract competitors, which may lead to a decrease in demand and profit levels for the original firm. Eventually, this competition results in zero economic profits in the long-run equilibrium for all firms. Firms may also form cartels to act like a monopoly, choosing output levels where marginal revenue equals marginal cost, leading to positive economic profits.