Microeconomics: Normal Profit for a Purely Competitive Firm

Profit Maximization in a Purely Competitive Firm

• Profit maximization occurs when MR = MC
• Break-even point or normal profit occurs when P = ATC

Loss Minimization

• Economic loss occurs when P < ATC
• A firm will still produce if MR > minimum AVC to minimize losses

Short-run Shutdown Case

• A firm shuts down in the short run if P < AVC
• A firm's shutdown point is where AVC is at its minimum

Characteristics of Pure Competition

• Very large numbers of sellers
• Standardized or identical product
• Price takers (no pricing power)
• Free entry and exit

Purely Competitive Demand

• Perfectly elastic demand
• Firm produces as much or little as they wish at the market price
• Demand graph is a horizontal line

Average, Total, and Marginal Revenue Formulas

• Average revenue (AR) = TR/Q = P
• Total revenue (TR) = P × Q
• Marginal revenue (MR) = ΔTR/ΔQ

Profit Maximization: TR – TC Approach

• A competitive producer will produce at the output level where TR > TC by the greatest amount
• Alternatively, produce at the break-even point or normal profit (P = ATC)

Short-run Competitive Equilibrium

• No additional information provided

Firm versus Industry

• Fallacy of composition: false idea that what is true for a part must also be true for the whole
• Example: individual students studying hard does not guarantee the entire class will perform well on an exam

Profit Maximization in the Long Run: Assumptions

• All firms in the industry have identical costs
• The goal of the firm is to make profits and avoid losses
• Easy entry and exit of firms
• Entry and exit of firms does not affect resource prices used in the industry (constant-cost industry)

This quiz covers the concept of short-run normal profit for a purely competitive firm, including profit maximization and break-even points. Test your understanding of microeconomic principles!