What Role Does A Competitive Market Play In The Economy?

The competitive market plays the role of equalizer. In a free market economy there are checks and balances in supply and demand. Competition allows buyers the opportunity to receive the best value for their money

How much wheat should Farmer Smith produce if wheat sells at $3 per bushel? How many pairs of shoes should tiny Fabiola's Fabulous Form fitters produce and sell if the market price of shoes is $40? These questions concern the supply behavior of perfectly competitive firms. We assume that our competitive firm maximizes profits, which are equal to total revenues minus total costs. Profit maximization requires that the firm manage its internal operations efficiently and make sound decisions in the market place.
Why would a firm want to maximize profits? Profits are like the net earnings or take home pay of a corporation. They represent the amount a firm can pay in dividends to the owners, reinvest in new plant and equipment, or employ to make financial investments. All these activities increase the value of the firm to its owners.
Competitive firms cannot affect the price; the price for unit sold is the extra revenue that the firm will earn. For example, at a market price of$40 per unit, the competitive firm can sell all it wants at $40. if it decides to sell 101 units rather than 100 units, its revenue goes up by exactly $40.