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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