Final answer:
Profit-maximizing firms practice Cost optimization by adjusting production to maximize profits based on marginal revenue and marginal cost. Market dynamics can ultimately lead to a zero-profit equilibrium in competitive markets due to entry and exit decisions.
Step-by-step explanation:
Profit-maximizing firms adjust their methods of production in response to changes in relative prices. This behavior in business is referred to as Cost optimization. Without complete data to construct a total cost curve for all production levels, firms experiment with producing slightly different quantities to observe the impact on profits. By examining how changes in production affect marginal revenue and marginal cost, firms attempt to find the most profitable production point.
On a broader scale, if a firm is earning positive economic profits, other firms might enter the market, leading to increased competition. This scenario results in a decrease in demand for the original firm's product and a reduction in the profit-maximizing level of output, gradually leading to an equilibrium where firms earn zero economic profits in the long run. In perfectly competitive markets, price levels adjust due to entry and exit decisions by firms, ultimately moving toward the zero-profit point where the market price equals the average cost at the profit-maximizing output.