Description 
The narrator discusses how Mort 
maximizes profit in a perfectly 
competitive market. From Mort’s 
perspective, price is independent of 
the quantity he produces. Thus, the 
demand curve is horizontal at the 
market price. This is his individual firm 
demand curve. For a perfectly 
competitive firm, price, demand and 
marginal revenue are all represented 
by the same curve. In fact, the 
marginal revenue equals average 
revenue because price is the same at 
any quantity. With regard to costs, in 
the short-run, Mort obeys the golden 
rule of profit maximization. He operates 
where marginal revenue equals marginal 
cost in order to maximize profits. Thus, 
his short run profit is total revenue minus 
total cost. The anticipated long-run 
outcome of perfect competition is that 
firms will keep entering the market, 
increasing supply and lowering market 
price, until individual firms are making 
zero economic profit. At this point, firms 
will stop entering the market.
 

Audio Transcript 

Narrator: Mort operates in a perfectly competitive market. Now that ostrich burgers are a nationwide craze, there are many sellers and many buyers of ostrich meat.

Narrator: The market dictates what price Mort can charge for his ostrich meat. Mort: Well, Marge. I'd love to help ya - you know I would, but I'd be losin' money if I lowered my prices for ya. I’ve got plenty of other customers willing to pay the market price. 

Narrator: From Mort’s perspective, price is independent of the quantity he produces. He’s a price taker.  Thus, the demand curve is horizontal at the market price. This is his individual firm demand curve. 

Narrator: Since price is a given, we know that for each additional unit Mort sells, his change in total revenue, or marginal revenue, is equal to that price. Thus, for a perfectly competitive firm, price, demand and marginal revenue are all represented by the same curve. In fact, the marginal revenue equals average revenue because price is the same at any quantity.

Narrator: Now let's consider Mort's costs.

Narrator: In the short-run, Mort obeys the golden rule of profit maximization. He operates where marginal revenue equals marginal cost in order to maximize profits.

Narrator: This occurs at quantity Q1. At this point, Mort's total revenue is price times Q1, while his total cost is the average total cost times quantity Q1.

Narrator: His short run profit is total revenue minus total cost.

Narrator: For a perfectly competitive market in the long run, new firms enter the market freely when it becomes known that there are profits to be made. As new firms enter, the market supply increases.

Narrator: This brings down the market price. Individual sellers are faced with lower revenues, while their costs are likely to stay about the same. This results in decreased profit.

Narrator: The anticipated long-run outcome of perfect competition is that firms will keep entering the market, increasing supply and lowering market price, until individual firms are making zero economic profit. At this point, firms will stop entering the market.

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