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## PowerPoint Slideshow about ' AP Economics' - ellard

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AP EconomicsMr. Bernstein

Is this Perfectly Competitive firm making a profit?

AP EconomicsMr. Bernstein

Is this Perfectly Competitive firm making a profit?

- Profit Maximizing Output = 5
- Profit Per Unit = 8-6 = 2
- Total Profit = 5 * 2 = 10

AP EconomicsMr. Bernstein

Is this Perfectly Competitive firm making a profit?

- The Profit can be

viewed as a rectangle

with size Q * (P – AC)

MC

ATC

ATC

P

P=MR=d=AR

Q*

Output

AP EconomicsMr. BernsteinIs this Perfectly Competitive firm making a profit?

- NO!!
- ATC > P

MC

ATC

P=MR=d=AR

Output

Q*

AP EconomicsMr. BernsteinIs this Perfectly Competitive firm making a profit?

- P = ATC
- Economic Profit = 0
- AKA Normal Profit
- Breakeven Point
- Only occurs at the

minimum of the

ATC curve…

AP EconomicsMr. Bernstein

The Short-Run Production Decision

- Why continue to produce if P = MR = MC?
- Because loss from producing at P = MC may be less than loss of producing 0!
- The Shut-down Rule:
- Shut down if TR < TVC
- Shut down if P < AVC

$

ATC

P=ATC

P=MR=d=AR

Output

Q*

AP EconomicsMr. BernsteinThe Short-Run Production Decision

- Shut down when P < AVC (MC is supply curve)

AVC

Shut-down

Price

AP EconomicsMr. Bernstein

The Long Run Production Decision

- In the long run, firms unable to earn a profit would not only shut down short term, they would exit the industry
- Remember in Perfect Competition there are no barriers to entry or exit

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