KRUGMAN'SMICROECONOMICS for AP*

Introduction to Perfect Competition

Margaret Ray and David Anderson

Micro:

Econ:

22

58

Module

What you will learnin this Module:

• How a price-taking firm determines its profit-maximizing quantity of output.

• How to assess whether or not a competitive firm is profitable.

Profit Maximization in PC

Optimal output

rule:

produce the quantity where MR=MCMR=MC and profit will be maximized!

Production and Profits

• Firms are price-takers

• P = MR

• MR = D = AR

• Profit maximization occurs at the output level where MC = P

Profit Maximization in PC

The profit maximizing level of output is found where P = MC on the graph.

Calculating Profits

• Total profit

• π= TR – TC

• If TR>TC; positive profit

• If TR < TC; negative profit

• Profit per unit

• If P > ATC; positive profit

• If P < ATC; negative profit

Table 58.1 Short-Run Costs for Jennifer and Jason’s FarmRay and Anderson: Krugman’s Economics for AP, First EditionCopyright © 2011 by Worth Publishers

Figure 58.1 The Price-Taking Firm’s Profit-Maximizing Quantity of OutputRay and Anderson: Krugman’s Economics for AP, First EditionCopyright © 2011 by Worth Publishers

Table 58.2 Short-Run Average Costs for Jennifer and Jason’s FarmRay and Anderson: Krugman’s Economics for AP, First EditionCopyright © 2011 by Worth Publishers

Figure 58.2 Costs and Production in the Short RunRay and Anderson: Krugman’s Economics for AP, First EditionCopyright © 2011 by Worth Publishers