When does a perfectly competitive firm achieve profit maximization?

In a perfectly competitive market, a firm achieves profit maximization when marginal cost equals marginal revenue, and this marginal revenue is also equal to the market price. This relationship is pivotal in perfect competition, where firms are price takers; they cannot influence the market price and must accept it as given.

When a firm produces an additional unit of output, the additional revenue earned from selling that unit (marginal revenue) should equal the additional cost incurred in producing that unit (marginal cost). If marginal revenue exceeds marginal cost, the firm can increase profit by producing more, while if marginal cost exceeds marginal revenue, the firm would be losing money on additional production and should cut back. The equilibrium point where marginal cost equals marginal revenue signifies that any further production would not increase profits, thus indicating profit maximization.

In perfectly competitive markets, the equilibrium price also equals marginal revenue. Therefore, at the profit-maximizing output level, the conditions show that marginal cost equals marginal revenue, which is also equal to the price in the market. This comprehensive understanding is essential for firms operating in such markets to ascertain their optimal production levels and maximize their profits effectively.