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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

what is demand
Gabriel Reply
Demand refers to the quantities of product or service that potential buyers are willing and able to buy.
Gcina
is the all your satistaction
Ali
What are the causes of Monopoly
Alex Reply
more price, less quantite
Fermin
is the market which is clossed few people
Ali
what is national accounting
Ezichi Reply
is GDP good to measure living standard in countries
Samu Reply
When the GDP increase this will lead to high employment, high standards of living, high level of import and export, available of trade barrier
Rnooma
How are you doing today
Tamba Reply
what is price mechanism
Deyin Reply
In economics, a price mechanism is the manner in which the profits of goods or services affects the supply and demand of goods and services.
Lamin
how can unemployment can be prevented, or the facts to reduce unemployment
Elina Reply
provision of job opportunity
Bernice
is by creating job facilities
Lamin
Hi
Jonathan
yeah how are you doing?
Lamin
Hello
Esther
Am fine
Esther
yeah
Lamin
More vocational and technical institutions
Perthra
non motivational community
Ifraah
How are you doing today my dear
Tamba
Great
Peter
by providing adequate job facilities
Akosua
well
Daniel
principle of economic
Atinga Reply
what is elasticity
Bernice Reply
economic
sonu
A measure of the responsiveness of one variable to a change in another.
Ousmatu
if the %± (change) in quantity demanded exceed the %± in price
muhammed
type of demand
Usama
What is a budget constraint?
Nsonga Reply
A budget constraint refers to all the combination of goods and services that can be purchase by a consumer.
Bernice
What is economics
Haftamu Reply
Economics is the study of how human beings make decisions in the face of scarcity.
Nsonga
Hello my fellow colleges...
Blessful Reply
Hello
Nsonga
good morning
Samuel
what is demand?
Abdish
Demand is the combination of the consumer's needs, wants and expectations
CIISE
thank you.
Abdish
good evening
Bernice
evening hope everyone is okay
Qwa
what is demand
KING Reply
what is demand
Ntwanano
Demand is an economic principle that refer to consumer purchasing goods and services and they are willing to pay price for specific goods and services increase in goods products this will lead to decrease the amount of demand am I right?
Rnooma
you try..
Blessful
Sorry
Rnooma
Demand refers to various quantity of a commodity that consumers are willing that able to buy at various price within a given period of time
Bernice
Yes.. yes correct.
Blessful
what is demand
Addea
Demand refers to the willingness and ability of consumers to purchase a given quantity of a good or service at a given point in time or over a period in time. In economics, demand is formally defined as ‘effective’ demand meaning that it is a consumer want or a need supported by an ability to pay
Adorer
Demand= wants+needs+expectations
CIISE
what is demand and supply
Lansana Reply
what is demand
Usama
demand is defined as desire for a commondity and ability to pay a price and effective demand,
SELVAM
what is a perfect market
Ephriem
the perfect market means #large number of buyers and sellers, #homogeneous products, #free entry and exit conditions, #perfect knowledge on the part of buyers and sellers#absence of transport cost, #absence of government intervention, above stated the features are perfect market or competition
SELVAM
what is liquidity
VICTOR Reply
the ability to easily turn asset or investment to cash
Johnson
liquidity is refers to the ease with which an asset or security, can be converted into ready cash without affecting it's market price. example is milk and checking a account in the bank.
Gyamfua
the meaning PPP is public _private partnership and PPP in economic is purchasing power_parity.
Gyamfua
when your income increase your demends increase
Ali Reply

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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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