AP Microeconomics 3.5, 3.6, and 3.7 Profit maximization

marginal cost

additional cost from producing an additional unit

marginal revenue

additional revenue from the sale of an additional unit

MR is the

price

Profit maximizing rule

MR=MC

profit maximizing quantity in graph

intersection of MC and MR

If the price is greater than ATC it means that

the firm is profiting

If the price is less than ATC but greater than AVC it means that

the firms is losing but should NOT shut down

If the price is les than ATC and AVC it means that

the firm is losing and should shut down

profit formula

TR-TC ; tr=mr times q

sunk cost

cost that has already been incurred and therefore should not play into the decision making process

Perfect competition has

• many firms

• identical products

• price takers

• no barriers

perfect competition on a graph: price

set by market

perfect competition on a graph: set dotted line to

MR=D=AR=P

perfect competition on a graph: firms will produce where

MR=MC