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AP Economics

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

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  1. AP Economics Mr. Bernstein Module 59: Graphing Perfect Competition November 5, 2013

  2. AP EconomicsMr. Bernstein Is this Perfectly Competitive firm making a profit?

  3. 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

  4. AP EconomicsMr. Bernstein Is this Perfectly Competitive firm making a profit? • The Profit can be viewed as a rectangle with size Q * (P – AC)

  5. $ MC ATC ATC P P=MR=d=AR Q* Output AP EconomicsMr. Bernstein Is this Perfectly Competitive firm making a profit? • NO!! • ATC > P

  6. $ 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…

  7. 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

  8. 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

  9. 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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