Our basic assumption about any firm is that it is a profit maximizer. If we suppose that perfectly competitive firms have maximization of profits as their primary motivation, we can easily understand their supply behavior.
Simply put, if a firm is a profit maximizer it should sell any unit of output for which revenue is greater than cost, and should not sell any units for which costs are greater than revenues. In this way, it will miss no profit opportunities.
Suppose a firm is wondering if it should expand output by one
more unit; say, from 100 to 101. In the short run, if producing
the 101st unit increases costs by $9 and selling the 101st unit increases revenues by $10, it should produce and
sell the unit, since its profits would increase by $1. If costs would
increase by $10 and revenues by only $9, it should not, because its
profits would fall by $1. These are very simple but, as we shall
see, very powerful insights.
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