Module
Micro: 23
Econ: 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.
• How to determine a perfect competitor’s
profit or loss.
• How a firm decides whether to produce
or shut down in the short run.
Perfect Competition Graphs
How is this
perfectly
competitive firm
doing? Is it
earning a profit or
a loss?
MC
ATC
P=D
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
Perfect Competition Graphs
MC
A firm earning
a profit.
ATC
P=D
Perfect Competition Graphs
$
MC
ATC
Loss
A firm
experiencing a
loss.
ATC
P=MR=d=AR
P
Q*
Output
Perfect Competition Graphs
$
MC
ATC
A firm earning a
P=ATC
P=MR=d=AR
normal profit.
Q*
Output
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
Perfect Competition Graphs
MC
$
ATC
AVC
The shut-down
price
P=ATC
Shutdown
Price
P=MR=d=AR
A
Q*
Output
The Long Run
• When a firm is earning negative profits (a loss), in
the long run, it will exit the industry.
Figure 59.1 Profitability and the Market Price
Ray and Anderson: Krugman’s Economics for AP, First Edition
Copyright © 2011 by Worth Publishers
Figure 59.1 (a) Profitability and the Market Price
Ray and Anderson: Krugman’s Economics for AP, First Edition
Copyright © 2011 by Worth Publishers
Figure 59.1 (b) Profitability and the Market Price
Ray and Anderson: Krugman’s Economics for AP, First Edition
Copyright © 2011 by Worth Publishers
Figure 59.2 The Short-Run Individual Supply Curve
Ray and Anderson: Krugman’s Economics for AP, First Edition
Copyright © 2011 by Worth Publishers
Table 59.1 Summary of the Perfectly Competitive Firm’s Profitability and Production Conditions
Ray and Anderson: Krugman’s Economics for AP, First Edition
Copyright © 2011 by Worth Publishers