AP Micro Quiz 11

MR D AR P

All of the curves represented by the horizontal line at the market price for a perfectly competitive firm

Marginal Revenue, Demand, Average Revenue and Price

TR > TC

If Total Revenue is greater than Total Cost, the firm is profitable

TR = TC

If Total Revenue is equal to Total Cost, the firm is breaking even

TR < TC

If Total Revenue is less than Total Cost, the firm incurs a loss

P > ATC

If the market price is greater than Average Total Cost, then the firm is profitable

P = ATC

If the market price is equal to the Average Total Cost, then the firm is breaking even

P < ATC

If the market price is less than the Average Total Cost, the firm is incurring a loss

Break-Even Price

The market price at which a price-taking firm earns zero (normal) profit

Shut-Down Price

The market price at which a firm ceases production in the short run; equal to minimum average variable cost.

When equal to market price or exceeds, firm will produce a quantity at which MC equals price

Any price equal to or above the minimum average variable cost, a firm’s short run supply curve is the marginal cost curve

Sunk Cost

A cost that has already been incurred and is nonrecoverable; should be ignored in a decision about future actions

Short-Run Firm Supply Curve

Shows how an individual firm’s profit-maximizing level of output depends on the market price, taking the fixed cost as given

P > Minimum AVC

Firm produces in the short run

If P < Min. ATC, firm covers variable cost and some but not all of fixed cost

If P > Min. ATC, firm covers all variable cost and fixed cost

P = Minimum AVC

Firm indifferent between producing in the short run or not. Firm exactly covers variable cost.

P < Minimum AVC

Firm shuts down in the short run. Does not cover variable cost

P > Minimum ATC

The firm is profitable. Additional firms enter the industry in the long run

P = Minimum ATC

Firm breaks even. No incentive for any firm to enter or exist the industry in the long run

P < Minimum ATC

Firm unprofitable. The firm and other firms in the industry exit in the long run.

3 Questions

Should the firm produce?

If so, in what amount?

What economic profit(loss) will be realized?

Fixed Costs in Short Run

Fixed costs cannot be changed in the short run, so they don't affect a firm's decision to produce or shut down in the short run

Entry & Exit Decisions

Since fixed costs can be changed in the long run:

Price below the break even in the long run will lead to a firm exit

Price above the break even in the long run will lead to firm entry