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2. KRUGMAN’S
Economics
for AP®
S E C O N D E D I T I O N

3. Section 11
Module 58

4. What You Will Learn in this Module
Determine the profit-maximizing quantity of output for a price-taking firm
Assess whether or not a competitive firm is profitable
Section 11 | Module 58

5. Production and Profits
The price-taking firm’s optimal output rule says that a price-taking firm’s profit is maximized by producing the quantity of output at which the marginal cost of the last unit produced is equal to the market price.
The marginal revenue curve shows how marginal revenue varies as output varies.
Section 11 | Module 58

6. Short-Run Costs for Jennifer and Jason’s Farm
Section 11 | Module 58

7. The Price-Taking Firm’s Profit-Maximizing Quantity of Output
Section 11 | Module 58

8. When Is Production Profitable?
If TR > TC, the firm is profitable.
If TR = TC, the firm breaks even.
If TR < TC, the firm incurs a loss.
*Note: At times the marginal revenue at a given output may be greater than the marginal cost. This is preferable to a firm if the next unit creates a marginal revenue that is less than the marginal cost. They don’t have to equal but as close to equal without the MR<MC.
Section 11 | Module 58

9. Short-Run Average Costs for Jennifer and Jason’s Farm
Section 11 | Module 58

10. Costs and Production in the Short Run
Section 11 | Module 58

11. Profit, Break-Even or Loss
The break-even price of a price-taking firm is the market price at which it earns zero profits.
Whenever market price exceeds minimum average total cost, the producer is profitable.
Whenever the market price equals minimum average total cost, the producer breaks even.
Whenever market price is less than minimum average total cost, the producer is unprofitable.
Section 11 | Module 58

12. Summary
A producer chooses output according to the optimal output rule: produce the quantity at which marginal revenue equals marginal cost.
For a price-taking firm, marginal revenue is equal to price and its marginal revenue curve is a horizontal line at the market price. It chooses output according to the price-taking firm’s optimal output rule: produce the quantity at which price equals marginal cost.
A firm is profitable if total revenue exceeds total cost.
Section 11 | Module 58