ABSTRACT
This chapter examines how profit-maximizing firms behave in competitive markets when they take prices as given. We begin by defining profit as the difference between revenue and cost, then derive the key condition for optimal supply: marginal cost equals price. Focusing on price-taking firms—such as farmers or commodity producers—we show that their supply decisions are determined by the marginal cost curve, conditional on price being above average variable cost. The chapter also distinguishes between positive, zero, and negative profits and introduces the role of fixed versus variable costs in short-run decision-making. We explain how firm-level supply aggregates to market supply, and how shifts in cost or entry affect supply curves. Long-run equilibrium is characterized by zero economic profit due to free entry, and we define economic cost as the sum of accounting and opportunity costs. The chapter concludes by discussing how long-run supply may slope upward or downward depending on input constraints or learning-by-doing.
