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AP Economics. Mr. Bernstein Module 59: Graphing Perfect Competition November 5, 2013. AP Economics Mr. Bernstein. Is this Perfectly Competitive firm making a profit?. AP Economics Mr. Bernstein. Is this Perfectly Competitive firm making a profit? Profit Maximizing Output = 5

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Ap economics

AP Economics

Mr. Bernstein

Module 59:

Graphing Perfect Competition

November 5, 2013


Ap economics mr bernstein
AP EconomicsMr. Bernstein

Is this Perfectly Competitive firm making a profit?


Ap economics mr bernstein1
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 economics mr bernstein2
AP EconomicsMr. Bernstein

Is this Perfectly Competitive firm making a profit?

  • The Profit can be

    viewed as a rectangle

    with size Q * (P – AC)


Ap economics mr bernstein3

$

MC

ATC

ATC

P

P=MR=d=AR

Q*

Output

AP EconomicsMr. Bernstein

Is this Perfectly Competitive firm making a profit?

  • NO!!

  • ATC > P


Ap economics mr bernstein4

$

MC

ATC

P=MR=d=AR

Output

Q*

AP EconomicsMr. Bernstein

Is 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 economics mr bernstein5
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


Ap economics mr bernstein6

MC

$

ATC

P=ATC

P=MR=d=AR

Output

Q*

AP EconomicsMr. Bernstein

The Short-Run Production Decision

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

AVC

Shut-down

Price


Ap economics mr bernstein7
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