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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 the meaning of function in economics
Effah Reply
Pls, I need more explanation on price Elasticity of Supply
Isaac Reply
Is the degree to the degree of responsiveness of a change in quantity supplied of goods to a change in price
Discuss the short-term and long-term balance positions of the firm in the monopoly market?
Rabindranath Reply
how are you?
can you tell how can i economics honurs(BSC) in reputed college?
through hard study and performing well than expected from you
what should i prepare for it?
prepare first, in psychologically as well as potentially to sacrifice what's expected from you, when I say this I mean that you have to be ready, for every thing and to accept failure as a good and you need to change them to potential for achievement of ur goals
parna kya hai behencho?
Hello, dear what's up?
good morning
pls, is anyone here from Ghana?
Hw s every one please
Ys please I'm in Ghana
what is firms
Anteyi Reply
A firm is a business entity which engages in the production of goods and aimed at making profit.
What is autarky in Economics.
what is choice
Tia Reply
So how is the perfect competition different from others
Rev Reply
what is choice
please what type of commodity is 1.Beaf 2.Suagr 3.Bread
Alfred Reply
what is the difference between short run and long run?
Ukpen Reply
It just depends on how far you would like to run!!!🤣🤣🤣
meaning? You guys need not to be playing here; if you don't know a question, leave it for he that knows.
pls is question from which subject or which course
Is this not economics?
This place is meant to be for serious educational matters n not playing ground so pls let's make it a serious place.
Is there an economics expert here?
Okay and I was being serous
The short run is a period of time in which the quantity of at least one inputs is fixed...
that is the answer that I found online and in my text book
Meaning of economics
Suraj Reply
It will creates rooms for an effective demands.
Chinedum Reply
different between production and supply
What is the economic?
Economics is a science which study human behavior as a relationship between ends and scarce means which has an alternative use.
what is supply
what is different between demand and supply
Debless Reply
Demand refers to the quantity of products that consumers are willing to purchase at various prices per time while Supply has to do with the quantity of products suppliers are willing to supply at various prices per time. find the difference in between
Please what are the effects of rationing Effect of black market Effects of hoarding
Atty Reply
monoply is amarket structure charecrized by asingle seller and produce a unique product in the market
Cali Reply
I want to know wen does the demand curve shift to the right
demand curve shifts to the right when there's an increase in price of a substitute or increase in income
ask me anything in economics, I promise to try and do justice to the question, you can send me an email or message, I will answer
what are the factor that change the curve right
explain the law of supply in simple .....
the Law of supply: states that all factor being equal, when the price of a particular goods increase the supply will also increase, as it decreases the supply will also decrease
@Nana the factor that changes or shift the d demand curve to the right is 1) the increase in price of a substitute good or commodity 2) increase in income
you can send your questions I am Comr. Kin chukwuebuka
different between bill of exchange n treasure bill
so would you tell me what means an apportunity cost plz?
what is true cost
your question isn't correct naadi
define an apportunity cost?
orukpe ,is my question whats wrong or u dont know anything?
In a simple term, it is an Alternative foregone.
opportunity cost is the next best value of a scale of preference
Both of you are not correct.
opportunity cost: is a forgone alternative
Monopoly is where is one producer produces a given product with no close substitute
what is income effect?
Qwecou Reply
if you borrow $5000 to buy a car at 12 percent compounded monthly to be repaid over the next 4 year what is monthly payment
Nitish 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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