Lesson 3-5 Short Run Equilibrium in PC Short Run Equilibrium equals output level where MR = MC Firm will stay at this output level unless something causes a change to its MR or MC curves. 4 possible positions for a PC firm in SRE: Economic Profit-Making Break Even (No Economic Profit; P = ATC) Loss Minimizing (P > AVC) Shut Down ( P < AVC) Supply Curve for Perfect Competition is the MC curve: This is how many units the PC firm will supply to the market at various prices. Remember, the firm’s Marginal Costs increase as it produces more output so the firm must receive a higher price for these units to be more profitable.

Profit Maximization (P > ATC) $200 150 100 50 MR = MC MC P=$131 Economic Profit MR = P ATC Cost and Revenue AVC ATC=$97.78 Figure 8.3 shows the short-run profit maximization for a purely competitive firm. The MR=MC output enables the purely competitive firm to maximize profits or to minimize losses. In this case, MR (=P in pure competition) and MC are equal at an output, Q, of 9 units. At this output, P equals $131 and exceeds the average total cost, and A = $97.78, so the firm realizes an economic profit of P - A per unit. The total economic profit is represented by the green rectangle and is (Price - ATC) * 9. 1 2 3 4 5 6 7 8 9 10 Output 8-2 LO3

Loss-Minimizing (P > AVC) Cost and Revenue $200 150 100 50 1 2 3 4 5 6 7 8 9 10 Output MC Loss ATC=$91.67 ATC AVC MR = P P=$81 Figure 8.4 shows the short-run loss minimization for a purely competitive firm. If price, P, exceeds the minimum AVC (here $74 at Q = 5) but is less than ATC at the MR = MC output (here 6 units) then the firm will earn losses, but it will produce. In this instance the loss is P - A per unit, where A is the average total cost at 6 units of output and price equals $81. The total loss is shown by the red area and is equal to (P–ATC)*6. AVC = $75 MR = P 8-3 LO3

Shutdown Case (P < AVC) Cost and Revenue $200 150 100 50 1 2 3 4 5 6 7 8 9 10 Output MC ATC AVC = $74 AVC MR = P P=$71 Short-Run Shut Down Point: P = AVC P < Minimum AVC $71 < $74 This graph shows the short-run shutdown case for a purely competitive firm. If price, P (here equal to $71), falls below the minimum AVC (here $74 at Q = 5), the competitive firm will minimize its losses in the short run by shutting down. There is no level of output at which the firm can produce and incur a loss smaller than its total fixed cost. In other words, the $100 fixed cost is the minimum possible loss. Remember: Produce where MR=MC as long as P > AVC 8-4 LO3

Break Even Point (P = ATC)