Answer to Question #251817 in Macroeconomics for Sany

Question

Explain how a competitive firm, profit maximizing firm decides how much of each factor of production to
demand?

Answer 1

A competitive, profit maximizing firm decides how much of each factor of production to demand based on how it will affect its profits. For instance, if a company decides to hire additional labor it will do so until production labor equals real wage.

A perfectly competitive firm has to decide to sell as large quantity as possible as long as it accepts prevailing market price. In doing so total revenue will increase as the firm sells more, depending on price and number of units sold. An increase in number of unitssold at a given price will increase total revenue. An increase in the prices of the product sold will lead to an increase in total revenue.