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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

Mr. Bernstein

Module 59:

Graphing Perfect Competition

November 5, 2013

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. Bernstein

Is this Perfectly Competitive firm making a profit?

• NO!!

• ATC > P

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 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. Bernstein

The 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