01:220:102 Lecture Notes - Lecture 17: Average Variable Cost, Perfect Competition, Fixed Cost

• School: Rutgers University
• Department: Economic
• Course: 01:220:102
• Professor: goldband

Document Summary

We use economic profits, which includes implicit costs. It is normal for a firm"s economic fromit to be zero. If tr > tc, the firm is profitable. If tr = tc, the firm breaks even. If tr < tc, the firm incurs a loss. If the price is just high enough to cover atc and if it chooses the quantity where mr = mc, the firm will still break even, even if they are not making profit. Profit = tr - tc = (tr/q - tc/q) * q. Another way to look at this is that profit = (price - atc)*quantity. The break-even price of a price taking firm is the market price at which it earns zero profit. When the market price is below atc, the firm is not profiting but actually making a loss. This is not necessarily mean that the firm needs to stop producing. Even when making a loss, optimal production rule still applies.