MEASURING PROM IN OUR GRAPH FOR THE COMPETITIVE FIRM

As we analyze exit and entry, it is useful to be able to analyze the firm’s profit in more detail. Recall thatprofit equals total revenue (TR) minus total cost (TC):

Profit = TR – TC.

We can rewrite this definition by multiplying and dividing the right side by Q:
Profit = (TRQ – TCIQ) X Q.

Figure 4 The Competitive Firm’s Long-Run Supply Curve

 

 

Panel (a) of Figure 5 shows a firm earning positive profit. As we have already discussed, the firm maximizes profit by producing the quantity at which price equals marginal cost. Now look at the shaded.

Figure 5 Profit as the Area between Price and Average Total Cost

Similarly, panel (b) of this figure shows a firm with losses (negative profit). In this case, maximizing profit means minimizing losses, a task accomplished once again by producing the quantity at which price equals marginal cost. Now consider fhe shaded rectangle. The height of the rectangle is ATC – P, and the width is Q. The area is (ATC – P) x Q, which is the firm’s loss. Because a firm’ in this situation is not making enough revenue to cover its average total cost, the firm would choose to exit the market.

 

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