Econ – Nov 2
Finding the Profit Maximizing Output for a Perfectly Competitive Firm
1. Find the quantity where P=MC, call this quantity q*.
2. At this quantity, q*, get the value of AVC.
Check the shutdown rule:
If PAVC, continue on the next steps
3. Find the ATC associated with the q*.
4. Calculate the maximum profits using p= (P – ATC)q*
From this process, we get the quantity, q*, that each firm produces and each firm’s
maximum profit. (each firm’s supply curve)
Q* = (Number of firms)q* because all of the firms are identical in a perfectly
competitive market. (market’s supply curve)
Supply Curve for the individual firm = MC until you get below AVC then it jumps to zero
Market Supply Curve = summation of supply curves of individual firms