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Graphing Perfect Competition

Module. Micro: Econ:. 23. 59. Graphing Perfect Competition. KRUGMAN'S MICROECONOMICS for AP*. Margaret Ray and David Anderson. What you will learn in this Module :. How to evaluate a perfectly competitive firm’s situation using a graph.

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Graphing Perfect Competition

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  1. Module Micro: Econ: 23 59 Graphing Perfect Competition • KRUGMAN'S • MICROECONOMICS for AP* Margaret Ray and David Anderson

  2. What you will learnin thisModule: • How to evaluate a perfectly competitive firm’s situation using a graph. • How to determine a perfect competitor’s profit or loss. • How a firm decides whether to produce or shut down in the short run.

  3. Perfect Competition Graphs How is this perfectly competitive firm doing? Is it earning a profit or a loss? MC ATC P=D

  4. Perfect Competition Graphs • Profit maximizing output = 5 • Profit per unit is ($8 - $6) = $2 • Profit is profit per unit times the number of units. $2 x 5 = $10 MC ATC P=D

  5. Perfect Competition Graphs A firm earning a profit. MC ATC P=D

  6. $ MC ATC Loss ATC P P=MR=d=AR Q* Output Perfect Competition Graphs A firm experiencing a loss.

  7. $ MC ATC P=ATC P=MR=d=AR Output Q* Perfect Competition Graphs A firm earning a normal profit.

  8. The Short-run Production Decision • When a firm is earning negative profits (a loss), will it continue to produce in the short run? • Compare the losses from producing at P = MC with the losses from shutting down (producing 0) • The shut-down rule • Shut down iff; • TR < TVC • P < AVC

  9. MC $ ATC P=ATC P=MR=d=AR Output Q* Perfect Competition Graphs The shut-down price AVC A Shut-down Price

  10. The Long Run • When a firm is earning negative profits (a loss), in the long run, it will exit the industry.

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