Lecture 15-Perfect Competition pt.2
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Thursday, November 5th, 2009.
MR = MC => q* is profit-maximizing level of output
Question: Is firm earning economic profits?
Is firm breaking even (zero economic profits)?
Is firm suffering economic loss?
To answer: add ATC schedule Ù compare P to ATC
Economic Profit = Total Revenue
Total Opportunity Cost (Explicit + Implicit)
Most Important Implicit Opportunity Cost: Invested Capital (Equity)
,QYHVWHG&DSLWDOHDUQV³QRUPDOUDWHRISURILW´Æ Economic Profit = Zero
(and Accounting Profit is Positive)
Level of profits:
1. Firm maximizes profits by producing where P = MC
2. Levels of profits:
TR > TC => profits => TR/Q > TC/Q Ù P > ATC
TR = TC => breakeven Ù P = ATC
TR < TC => loss => TR/Q < TC/Q Ù P < ATC
MR [= P]
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