How will a profit-maximizing firm in a perfectly competitive market react to an increase in the short-run market demand curve?

Question

Quizplus · Accepted Answer

In a perfectly competitive market, the firm faces a horizontal, perfectly elastic demand curve. Therefore, the firm can sell all of its output at the market price. An increase in market demand will lead to an increase in the market price. Since the firm is a price taker, it must accept this higher price. The marginal revenue curve will shift upwards, and the profit-maximizing level of output will increase, as long as the marginal cost of producing that output is less than the higher market price. Thus, the firm will increase its output.

How Will a Profit-Maximizing Firm in a Perfectly Competitive Market