How do perfectly competitive firms actually maximize their profits?

Question

Example of perfectly competitive firms: gas stations.

Answer 1

ERT!

Gas stations aren't considered perfect competition, but rather monopolistic competition, because of high barriers to entry, a small number of players (how many chains are there?), and competition on a basis other than price.

Still, profits are maximized, in a marginal analysis, by selling as many units as one can until cost = revenue.

Answer 2

Gas stations are NOT perfectly competitive firms. In a perfect competition, there is a single market price. Now look at gas stations; two stations at the opposite sides of the same street could charge 10 cents more or less for the same gasoline depending on which station is located more conveniently. Also, look at Arco; they don't take credit cards, but charge you $0.45 every time you use a debit card. These are not behaviors you observe in a pefectly competitive industry; they seriously smack of monopolistic competition...

But back to your question. Perfectly competitive firms cannot actively maximize their profit. They can either continue to operate (and earn whatever profit the market affords them) or shut down. High-cost producers shut down first.

Answer 3

In simple terms profitability is a function of productivity while productivity is a function of effectiveness (doing right things) and efficiency (doing things the right way).

Maximum effectiveness plus maximum efficiency equals maximum productivity. Maximum productivity equals maximized profitability.

Effectiveness is a strategic component of a business plan focusing on what the company wants to accomplish during the next, say, 1 to 5 years. For example: increase market share, develop new products/services, reduce operating expense.

Efficiency is the operational/tactical component focusing on how to accomplish the strategic objectives.

Well managed companies are continually working to use scarce resources (money and time) as productively as possible which is why they also demand continual improvements to effectiveness and efficiency.

If you really want to know more about how this works see if you can find a book titled "The Disciple of Market Leaders". It's an easy read and very informative. Sorry, I can't remember the author's name.

Cheers

jimmy

Answer 4

1. Avoid spillage/wastages
2. Cost cutting measures
3. USe the correct measuring equipments
4. Reporting any loss correctly
5. Have the records maintained by preferably an outside agency.
6. Periodic checks/visits help
7. Follow TPM Activities (Total Productivity Management and Six-Sigma guidelines)
8. These help in maximising profits
9. Maintenance shut-downs, if required on a periodic basis
10. Good Luck

Answer 5

How would you know about their exact quality...
The most honest and successfull frims usually don't achive the best positions in the world...