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Short-run outcomes for perfectly competitive firms

The average cost and average variable cost curves divide the marginal cost curve into three segments, as shown in [link] . At the market price, which the perfectly competitive firm accepts as given, the profit-maximizing firm chooses the output level where price or marginal revenue, which are the same thing for a perfectly competitive firm, is equal to marginal cost: P = MR = MC.

Profit, loss, shutdown

The graph shows how the marginal cost curve reveals three different zones: above the zero-profit point, between the zero profit point and the shutdown point, and below the shutdown point.
The marginal cost curve can be divided into three zones, based on where it is crossed by the average cost and average variable cost curves. The point where MC crosses AC is called the zero-profit point. If the firm is operating at a level of output where the market price is at a level higher than the zero-profit point, then price will be greater than average cost and the firm is earning profits. If the price is exactly at the zero-profit point, then the firm is making zero profits. If price falls in the zone between the shutdown point and the zero-profit point, then the firm is making losses but will continue to operate in the short run, since it is covering its variable costs. However, if price falls below the price at the shutdown point, then the firm will shut down immediately, since it is not even covering its variable costs.

First consider the upper zone, where prices are above the level where marginal cost (MC) crosses average cost (AC) at the zero profit point. At any price above that level, the firm will earn profits in the short run. If the price falls exactly on the zero profit point where the MC and AC curves cross, then the firm earns zero profits. If a price falls into the zone between the zero profit point, where MC crosses AC, and the shutdown point, where MC crosses AVC, the firm will be making losses in the short run—but since the firm is more than covering its variable costs, the losses are smaller than if the firm shut down immediately. Finally, consider a price at or below the shutdown point where MC crosses AVC. At any price like this one, the firm will shut down immediately, because it cannot even cover its variable costs.

Marginal cost and the firm’s supply curve

For a perfectly competitive firm, the marginal cost curve is identical to the firm’s supply curve starting from the minimum point on the average variable cost curve. To understand why this perhaps surprising insight holds true, first think about what the supply curve means. A firm checks the market price and then looks at its supply curve to decide what quantity to produce. Now, think about what it means to say that a firm will maximize its profits by producing at the quantity where P = MC. This rule means that the firm checks the market price, and then looks at its marginal cost to determine the quantity to produce—and makes sure that the price is greater than the minimum average variable cost. In other words, the marginal cost curve above the minimum point on the average variable cost curve becomes the firm’s supply curve.

Watch this video that addresses how drought in the United States can impact food prices across the world. (Note that the story on the drought is the second one in the news report; you need to let the video play through the first story in order to watch the story on the drought.)

Questions & Answers

What about Sydney Alexander's Absorption approach in international trade?
Vibhas Reply
I need help in inflation graphs
Brandon Reply
Select inflation type, Demand pull, cost pull or anticipation 1- Select the set of data you intend on graphing i.e inflation rate of 2017, location (particular country) 2 - Select the type of measurement tool that best allows you to input the inflation data, Consumer price index is the most accurate
this is to make sure you have all the correct information, Also use should know 1- Cost pull is Aggregate Demand and Aggregate Supply AD - AS graphed 2- Demans pull is Aggregate Supply and Aggregate Demand AS - AD graphed
what is production
Imoro Reply
what is a monopolistic competition?
moniman Reply
who is barter
Tening Reply
exchange goods each other
what is economic
is the use of scares resources to satisfy our unlimited needs and wants
how many kinds of utility functions?
What is partnership?
the legal association of two or more people as co-owners of a business for profit.
Would you expect the kinked demand curve to be more extreme (like a right angle) or less extreme (like a normal demand curve) if each firm in the cartel produces a near-identical product like OPEC and petroleum? What if each firm produces a somewhat different product?
James Reply
what is supply
Mizta Reply
what is opportunity cost
The opportunity gained interms of opportunity lost is known as opportunity cost Or The second best alternative use of resources
forgone alternative: like forgoing Something our of two to buy one
what is macro economic s
Addo Reply
macroeconomics is the study of economic as a whole level.
meaning of positive science
Sumit Reply
positive science it is focused on facts and cause and effect and behavioural relationship and include developmental testing in economic theoreis.
what is inflation
Sama Reply
inflation is the general price increase of goods and services in an economy.
Inflation is the persistent rise in the general price level
inflation is characterized by increase in the general price of goods and services. when there is too much money in circulation. increase in demand of goods pursuing fewer goods. when purchasing power of money decreases .
inflation is the persistent rise general price level
inflation is the persistent increase in price
how are you
increase in the general level of price...
what is deflation
is the gradual decrease of currency exchange in a country.
why ecnomics important ? give answer plz
Because is a field of science study that reflects on our day to day activities with human behavior.
why economic is a science
Economics is referred to as a social science not a pure science. It's regarded as a social science because it makes use of the scientific method to solve problems. The scientific method refers to observation, asking questions, forming hypothesis, experimentation etc
Economics is a social science because it study human behavior how he relates with his daily activities with the available limited resources to satisfy his wants.
what are the factors affecting the demand
yeah it uses the scientific method to study human behaviour.
inflation referes to the persistant increase in the general price of goods and services over a given period of time say a year.
factors affacting Demand of good and services are 1.price of a commodity in question 2.price of related commodity 3.Income of a consumer 4.Population 5.tast and prefereance 6.Season or weather condition
what is difference between perfect and non perfect market.
what the difference between Trade off and Opportunity Cost?
In trade off, you increase the amount of something by decreasing the amount of something else. For example, you use 2 hours to study and 2 hours for leisure. if you increase study hour by 1 more hour, i.e 3 hours, leisure time will decrease by 1 hour, i.e 1 hour.
In all, you would have traded off 1 hour of leisure time for 3 hours of study time. But in opportunity cost, you let something go in order to obtain something else entirely.
thanks for your idea
please i want help on thid question given P=$10 And TC=120+4Q2 1.find the profit maximizing level of price and quantity. 2.what will be the total profit?
please how is substitutional effect affecting demand
if a price of a particular commodity is high people demand less ,they rather go for less one
different between demand and quantity demand
Farhan Reply
No difference
demand is the overall demand for it
actually theres no difference
quantity demanded is used in Equilibrium of d and s
for evrything else u use deman
the difference of it is that when demand simply denotes the willingness and a person's ability to purchase. And as against quantity demand represent the amount of an economic good or services desire by a consumer at a fixed price .☺
how to calculate inflation
Richard Reply
Explain the factors that have led to high quantity demanded
Ogwang Reply
price of the product increase of price substitute product as people shift to cheap one
what are the methods used by trade union to increase wages of their members?
Black Reply
the size of the commodity
increase demand of labour decrease supply of labour
I do support your answer Jackel.
but how do they do it?
by increasing more labour and reduced the suppliers
they can not increase labour, they increase demand of labour.
how do they increase demand for labor?
by analyzing the market equilibrium , cost reduction and cost control , savings in time .
decreasing supply of labour are achieved through training and certification that require for you to employed, you must have certificate, also trade union encouraged government to restrict migration into the country causing shortage of labour supply. Note that the aim of union is to enhance life
objective of union: better working conditions, liveable wage, protect member from unfair treatment which are done through negotiations betweens representative and management. known as collective bargaining.
what is the nature of economics?
Tyscar Reply
economics is a social science since it seeks to solve social problem of scarcity
main concerns is the decision individuals make on the allocation of scarce resources among the competing wants

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Source:  OpenStax, Principles of economics. OpenStax CNX. Sep 19, 2014 Download for free at http://legacy.cnx.org/content/col11613/1.11
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