1. Mr. Bernstein Module 59: Graphing Perfect Competition October 2017
AP Economics
Mr. Bernstein
Module 59:
Graphing Perfect Competition
October 2017

2. AP Economics Mr. Bernstein
Is this Perfectly Competitive firm making a profit?

3. AP Economics Mr. Bernstein
Is this Perfectly Competitive firm making a profit?
Profit Maximizing Output = 5
Profit Per Unit = 8-6 = 2
Total Profit = 5 * 2 = 10

4. AP Economics Mr. Bernstein
Is this Perfectly Competitive firm making a profit?
The Profit can be
viewed as a rectangle
with size Q * (P – AC)

5. AP Economics Mr. Bernstein
Is this Perfectly Competitive firm making a profit?
NO!!
ATC > P
ATC P Q* MC
P=MR=d=AR $
Output

6. AP Economics Mr. Bernstein
Is this Perfectly Competitive firm making a profit?
P = ATC
Economic Profit = 0
AKA Normal Profit
Breakeven Point
Only occurs at the
minimum of the
ATC curve…
ATC Q* MC
P=MR=d=AR $
Output

7. AP Economics Mr. Bernstein
The Short-Run Production Decision
Why continue to produce if P = MR = MC?
Because loss from producing at P = MC may be less than loss of producing 0!
The Shut-down Rule:
Shut down if TR < TVC
Shut down if P < AVC

8. AP Economics Mr. Bernstein
The Short-Run Production Decision
Shut down when P < AVC (MC is supply curve)
ATC
P=ATC Q* MC
P=MR=d=AR $
Output
AVC
Shut-down
Price

9. AP Economics Mr. Bernstein
The Long Run Production Decision
In the long run, firms unable to earn a profit would not only shut down short term, they would exit the industry
Remember in Perfect Competition there are no barriers to entry or exit