KRUGMAN'S MICROECONOMICS for AP* Graphing Perfect Competition Margaret Ray and David Anderson Micro: Econ: Module

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 A firm earning a profit. MC ATC P=D

Perfect Competition Graphs A firm experiencing a loss. ATC P Q* MC P=MR=d=AR $ Output Loss

Perfect Competition Graphs A firm earning a normal profit. ATC P=ATC Q* MC P=MR=d=AR $ 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 The shut-down price ATC P=ATC Q* MC P=MR=d=AR $ Output Shut- down Price A AVC

The Long Run When a firm is earning negative profits (a loss), in the long run, it will exit the industry.