Nor do we observe the price level rising and falling by large amounts in short periods of time. Thus, we need to spend some more time thinking about the nature of aggregate supply in the short run. Back to the Firm Let s think about how firms react to changes in demand for their products. That is, most firms are monopolistically competitive. They determine their profit-maximizing output level by equating MR and MC and finding the appropriate price on the demand curve.
Price is equal to marginal cost plus a markup.
Although I didn t stress the fact earlier in the semester, most firms also face marginal-cost curves that are horizontal over large ranges of production. These firms are able to produce additional units of output at the same marginal cost as previous units, since most firms aren t producing at maximum capacity most of the time. A final attribute, noted in our discussion of advertising, is that most firms depend on repeat customers for most of their sales. Retail outlets attract customers by offering the range of goods of a particular quality that their regular customers expect. They also charge prices that their regular customers expect.