Mostly summarized from Gregory Mankiw’s Principles of Economics, 5th Ed.
PART 5 Firm Behavior
and the Organization of Industry
Chapter
14 of 36 – Firms In Competitive Markets
Section
17 of 24
…
Figure
5 here
…
Figure
5 - Profit as the Area between Price and Average Total Cost
The
area of the shaded box between price and average total cost (ATC) is the firm's
profit, or loss
·
height of this box is price (P) minus average total cost, P - ATC
·
width of the box is the output quantity, (Q)
Panel
(a), P is above ATC, the firm has profit.
Panel
(b), P is below ATC, the firm has loss.
…
In
Figure 5
Panel
(a) shows a firm with a profit
· a
firm maximizes profit by producing the Q at which P = MC
·
the area of the rectangle (P - ATC) x Q is the firm's profit
Panel
(b) shows a firm with a loss
· here
the firm wants to minimize losses
·
this is also achieved by producing the Q where P = MC
·
the area of the rectangle (ATC - P) x Q is the
firm's loss
A
firm in a loss situation
· is
not making enough revenue to cover its ATC
· will
exit the market if the loss continues in the long run
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