Module Micro 23 Econ 59 Graphing Perfect Competition

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 Loss A firm experiencing a loss. ATC P P=MR=d=AR Q* Output

Perfect Competition Graphs $ A firm earning a MC 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 $ The shut-down price AVC P=ATC Shutdown Price ATC 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.