Price is determined by demand and supply in a Perfect Competitive industry.
It can be illustrated by the following diagram.

• Price which is determined as above, cannot be changed by one firm, therefore activities of a firm will be inactive.
• A firm can produce any amount of at the market determined price.
• Therefore a production in a Perfect Competitive firm is a price taker.
• A firm can supply any amount of goods at the prevailing price.
• Any amount of goods can be demanded at that price.
• The demand curve of a Perfect Competitive firm is perfectly elastic.

This can be illustrated with following diagram.

The production in short term is governed by technology and capacity of the firm.
Output and cost is divided on these components.
To obtain maximum loans in a short run, two important decisions should be taken. They are normally,

• Whether production should continue or close down?
• If production is to be continued, what is the amount of production?

• When deciding on output level according to maximization of profits, firms have to follows two alternative of profits, the firm has to follow two alternatives namely,
• Deciding on output level of maximum economic profits based on revenue and cost.
• Deciding on output level of maximum economic profits based on marginal revenue and total cost
• The total amount of money which a firm earns by selling its output to the market is termed as Total revenue.
• Total revenue can be calculated by multiplying quantity and price of good.
  TR = Q x P
  Total Revenue = Output x Price.

• Average revenue can be calculated by dividing Total revenue with quantity of goods

          AR = TR / Q
          Average Revenue = Total Revenue/ Output

• Change in total income, when producing one more extra unit is termed as marginal revenue,
• Change in total revenue should be divided by change in output to reach marginal revenue.

          Marginal Revenue = Change in Total Revenue / Change in output

          MR = ΔQ / Δ TR

• Determined price can be seen in a perfect competitive firms, therefore price of good, average revenue marginal revenue are equal to each other.
• Then P=AR=MR Concept is fulfilled.
• To illustrate relationship between Total Revenue average revenue and Marginal
  Revenue,

Following schedule and graph can be constructed.

• Economic profits can be gained by deducting total cost from total revenue.
• Relationship between total cost, Total revenue and economic profits can be illustrated by a schedule and a graph.

• According to the above schedule and the diagram the following factors can be concluded.
• Revenue curve will commence through the origin and slope upwards as the revenue is increased with inverse in output.
• Cost curve slopes upwards, as cost is increased with increase in output..
• Economic profit will be zero when the total cost and revenue curve intercept each other.
• If the total cost curve is higher than the revenue curve, economic losses can occur or zero economic profits.
• If the total revenue curve is higher than the total cost curve, economic profit occur.
• Economic profits will be maximize at mid point where the highest difference between the total cost curve and the total revenue curve.
• Marginal costs (MC) and marginal revenue (MR) analysis also can be used to illustrates
  profit maximization.
• If marginal cost is less than marginal revenue(MR>MC) it means the firms will make
  extra profits by selling more units.
• If marginal revenue is less than marginal cost (MC>MR) firms will take losses by
  producing extra units.
• To maximize their profits, firms should produce where marginal revenue and marginal
  cost are equal.(MR=MC).
• According to marginal analysis, the output level of profit maximization should be according
  to the condition of MR=MC.
• Maximization of profit under marginal analysis, can be illustrated using the following
  schedule.

• The following factors can be gained from the above schedule.
• Economic profits will remain between 8th and 9th units of production.
• Firms leave to reduce profits between 9th and 10th units of production.
• At the 9th units of production there is no increase or decrease in profits. Profits are
  maximized.

Profit maximization of a perfectly competitive firm can be illustrated through the following
diagram.

According to the above graph,

• If the output is less than 9 units profits can be increased by increasing the output.
• At the 9th unit economic profits are maximized.
• If the output is more than 9 units economic profits will decrease.
• Economic profits will remain between 8th and 9th units of production.

Short run behaviour of a perfectly competitive firm, can be explained through three alternative situations. Such as,

• Producing earnings with economic profits
• Producing earnings with zero economic profits
• Producing earnings with economic losses
• When economic profits are earning, the selling price of a unit is more than the average total cost (ATC/AC).

This can be illustrated through the following graph.

• According to the above graph, profits are maximized at the 9th unit, the total economic profits are illustrated by the schedule area.
• When economic profits are zero, the selling price of a unit equals average revenue.
• This is illustrated by the following graph.

• Under this condition, firm will remain in the industry, because they get an income which is
  equal to average cost.
• If the selling price of the product is less than the average cost, that is with economic losses
  even a firm will produce in the short run process.
• If the losses by closing down the firm is less than that while producing , the firm will remain
  in the industry.
• This situation can be illustrated through the following graph.

• The schedule area illustrates the total losses of a firm which is producing with losses of a firm which is producing with losses in the short run.
• Perfect competition is a hypothetical market.
• A production firm can avoid variable cost in the short run but not the fixed cost.
• If the firm cannot cover up the total cost with its revenue production will be
  discount need.
• If there price is less than the average variable cost, losses will increase with
  grater production.