Perfect competitive firms are price-takers, operate in markets with many other competitors, manufacture homogenous products with perfect substitutives provided in the same market, and operate in markets with free entry and exit (no barriers). These features generate a perfectly elastic demand function, an hortizontal line for a certain price level, as the firm has to assume the existing price in the market.
Marginal cost and marginal revenue are compared in order to decide which is the optimal amount of production to maximize the firm's profits. This happens in the scenario in which marginal revenue equals marginal costs.
Marginal revenue (MR) is the amount earned for selling an extra unit, which in the perfect competition scenario equals the market price of the product. The marginal cost (MC) is the cost of producing on extra unit of output.
When MC>MR, of course producing one more unit is unprofitable and therefore, unoptimal.
When MC<MR the extra unit is profitable, then the firm should increase the production until reaching MC=MR, that is the point at which they should not move anymore.
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