perfect competition in the short-run

profit

total revenue - total cost

profit alt. equation 1

(P Q produced) - (ATC Q produced)

profit alt. equation 2

(P - AC) * Q produced

characteristics of perfect competition:

- many firms but identical product

- many buyers

- all relevant info is available about price, quantity, and quality

- each seller has minimal market impact

- sellers are price takers

- no barriers to entry

what does being a price taker mean for product elasticity?

the firm faces a perfectly elastic demand curve for its product

- buyers are willing to buy any number of units of output from the firm at the market price

1st way of determining the profit maximizing amount of output:

calculate the total profit at each quantity for comparison

- MR = MC

2nd way of determining the profit maximizing amount of output:

use the optimal output rule

optimal output rule

the application of the principle of marginal analysis to the producer's decision of how much to produce

MR = MC

- profit is maximized by producing the quantity at which the marginal revenue of the last unit produced is equal to its marginal cost

where is max profit on a graph?

it is located where the MC curve crosses the MR curve (the horizontal line at market price)

when will the firm earn profits?

if the price that a producer charges is higher than its ATC of production for that quantity produced

when will the firm suffer losses?

if the price that a producer charges is lower than its ATC of production for that quantity produced

- however the firm may not shut down after already paying FC

if p > ATC then

profit occurs

if p = ATC then

zero profit

if p < ATC then

loss occurs

breakeven point

the point where P = ATC

- the firm is covering all of its economic costs

- also called earning a 'normal profit'

shut down point

the intersection of the AVC curve and the MC curve

what does the shut down point show?

the price where the firm would lack enough revenue to cover its variable costs

what happens if price is above the shut down point?

VC and FC are covered; so losses are smaller

what happens if price is below shut down point?

VCs are not covered and losses are larger

if p < min AVC then

the firm will shut down

supply curve in the short run

- below AVC: shutdown

- between AVC and ATC: loss but can continue operating

- above AVC: zero-profit point

firms SR decision to shut down:

refers to a temporary stop in product

- must still pay FC (aka sunk costs)

shut down points:

- TR < VC

- TR/Q < VC/Q

- AR < AVC

- P < AVC

where is competitive firm's SR supply curve?

the portion of the MC curve that lies above the AVC curve

if MR > MC then

increase production

if MR < MC then

decrease production

if MR = MC then

at profit maximizing point