AP Economics
Mr. Bernstein
Module 59:
Graphing Perfect Competition
November 2016
AP Economics
Mr. Bernstein
Is this Perfectly Competitive firm making a profit?
2
AP Economics
Mr. Bernstein
Is this Perfectly Competitive firm making a profit?
• Profit Maximizing Output = 5
• Profit Per Unit = 8-6 = 2
• Total Profit = 5 * 2 = 10
3
AP Economics
Mr. Bernstein
Is this Perfectly Competitive firm making a profit?
• The Profit can be
viewed as a rectangle
with size Q * (P – AC)
4
AP Economics
Mr. Bernstein
Is this Perfectly Competitive firm making a profit?
• NO!!
• ATC > P
$
MC
ATC
ATC
P=MR=d=
AR
P
Q*
Output
5
AP Economics
Mr. Bernstein
Is this Perfectly Competitive firm making a profit?
$
• P = ATC
M
C
ATC
• Economic Profit = 0
• AKA Normal Profit
• Breakeven Point
• Only occurs at the
minimum of the
ATC curve…
P=MR=d
=AR
Q*
Output
6
AP Economics
Mr. 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
7
AP Economics
Mr. Bernstein
The Short-Run Production Decision
• Shut down when P < AVC (MC is supply curve)
$
MC
P=ATC
ATC
AVC
P=MR=d=
AR
Shut-down
Price
Q*
Output
8
AP Economics
Mr. 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
9