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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.

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Questions & Answers

causes of high elasticity of demand
Onyango Reply
causes of high elasticity of supply
I think there' s a mistake. P = - 0.4 + 0.2Qs is the supply curve and not the demand curve. Am I correct?
Valeria Reply
Qs is quantity supplied
This is what I think
this eaquation is supply curve Qs=P-0.4 the relationship is positive when the price increase the Qs increase....
since Qs is quantity supplied P= -0.4 + 0.2Qs =>P +0.4=0.2Qs =>P/0.2 + 0.4=Qs I made Qs the subject of the formula or equation. So your answer is correct
P = -0.4 + 0.2Qs is the same as P/0.2+0.4=Qs Price has a direct relationship with the quantity supplied i.e the higher the price the higher the quantity supplied. that is why it is +0.4(this is the quantity and it is postive) and P/O.2(is the price and it is positive).
For the demand equation let me give an example 0.2P-0.4=Qd. Here the P is postive(+0.2) and the quantity which is -O.4 is negative( because of the negative sign(-) there is an inverse relationship between price and quantity. For quantity demanded the higher the price the lower the quantuty.
It's how I understand it
0.2P-0.4=Qd. the equation is wrong because the price have direct ralationship Quantity demanded but the correct equation is-0.2P -0.4=Qd so the higher price the lower Quantity
I think the relationship is inverse because of the negative sign(-)
ok You mean the price and quantity demanded should be negative(inverse relationship) for Qd and the price and quantity supplied should be postive(direct relationship) for Qs
thank you for the correction
yes because it got a positive gradient of +0.2
This is the mistake I found: "Since P is on the vertical axis, it is easiest if you solve each equation for P. The demand curve is then P = 8 – 0.5Qd and the demand curve is P = –0.4 + 0.2Qs. Note that the vertical intercepts are 8 and –0.4, and the slopes are –0.5 for demand and 0.2 for supply."
dear price do not depend on quantity. rather quantity depends on price. so the equation should be Qty=0.2Px-0.4
please can someone generate supply equation for me
David Reply
where p is price, Pr is price of related goods, G is goals of a firm E is supplier's future expectation of prices,Z is other related factors, Pf is cost of factors of production.
I think it's wrong
if Qd=90-p Qs=90+p
the coefficient of price must be positive since supply curve is positively slopping
it's true. thank you
diagram of perfectly inelastic
Muhd Reply
chi-square test is used to test A. Analysis of variance B. Association between the qualitative variables C. Difference between means of two distribution drawn from the same population D. Difference between the means of two distribution drawn from different population
Syk Reply
the Answer Should Be D
The answers is D
Thank you
What is economic?
is the system that study the difference between resources and the growth population
Economics studies humanbehaviour as a relation between ends and scarce means which have alternative uses
rigth .....but economic has different concepts
what is equilibrium
Obed Reply
it is that point where price is equal to output or rather a point where demand is equal to supply
it is a point where consumer get maximum satisfaction and producers maximise profit or minimise loss
supply equal demand in one point
it's a point where supply and demand meets/equal whether profit or loss
how to compute budget constraint
Kristine Reply
how to calculate balance of payment deficit
How to calculate National income
what,how and for whom to produce
kunle Reply
those are problem that producer face in the process of production due to scarcity
a particular selected product is produced in a systematic hygiene condition and is produced for the customers.
what are the factors of economic growth?
Povuuro Reply
tax, imports and exports, etc
welcome on board
Explain the paradox of poverty in the midst of plenty?
moses Reply
total production diagram explain
Udayan Reply
what is the formula of price elasticity demand
Sherry Reply
%change in Quantity demand/%change in price
%change QD / %change P
How can hight interest rate affect the level of GDP?
Yori Reply
simple because of high interest it become revenue for our nation and it self it also rise our national income or GDP
how does the government regulate markets and improve market outcomes
Ranveer Reply
The government tries to combatmarket inequities through regulation, taxation, and subsidies. ... Examples of this include breaking up monopolies and regulating negative externalities like pollution. 
Governments may sometimes intervene in markets to promote other goals, such as national unity and advancement.
by applying and regulating fiscal and montary policy the concerned govt can improve almost all markets
it does not improve
Give the differences between labor&financial markets
Andrew Reply
this is the differences

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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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