MC P MR p* ATC AVC D Q Q Q* Market Firm 37 MC P MR p* ATC AVC D Q Q Q* Market Firm 36 Often we hear of major firms like IBM posting a loss, but they stay open When does a firm shut down? Break Even Point - P = ATC Firm is earning normal profits. Just because a firm is losing money in the short run doesn’t mean it should close its doors.
So the firm has no interest in making one moreġ5 Profit Maximizing And at Q4, MRATC at q*, there will be a profit.īut it may be possible that no matter how much is produced, the firm will still lose money In this case the Q* is the quantity where the firm loses the least amount of money For example.Ģ3 Loss p MC ATC AVC atc The area is the loss p* MR Q* Q 25 This means the firm will make more profit by making one more, so they will The same is true at Q2ġ4 Profit Maximizing But at Q3, MR=MC, meaning that the firm will get exactly as much money from selling one more as it cost them to make one more. Note that it can sell as much as it wants at that price 4Īt P > p*, Sales = 0 At P MC, meaning that the additional revenue from selling one more is greater than the cost of making one more. So it has to sell the product at the market price. Firms Because a firm makes the same thing as so many other firms, if an individual firm changes its price, it will lose ALL of its business. They take the market price as given and purchase according to their demand curve. is our "Benchmark" Model meaning it is not very realistic, but will be used to compare with more realistic models 3Ģ Firm's Demand Curve Consumers are Price-takers Firms Buyers and sellers have perfect information Perfect Comp. 1 Introduction Characteristics of Perfect Competition
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