Marginal Costs are rising at the point where MC = Marginal Revenue.
A firm maximizes profit by charging a price where MR (which equals Price) = Marginal Costs.
In the Short Run:
When MC=MR is above the Average Total Cost curve, economic profit is made.
- This economic profit equals Quantity*(Price – Average Total Cost)
When MC=MR is below the Average Total Cost curve, there is economic loss.
- This economic loss equals Quantity*(Average Total Cost – Price
When MC=MR at a point on the Average Total Cost curve, then there is zero economic profit. This is the
break-even point for a firm, and where most firms aim to be.
Since the marginal cost curve crosses the average variable cost curve and the average total cost curve at
their minimum, when P=MC=MR = Average Total Cost, the minimum average total cost is achieved.
Short-Run Showdown Decision
A firm will shut down in the short run if Total Revenue is less than Total Variable Costs.
- This is the same as Price < Average Variable Costs. Therefore, graphically: Short Run Industry Supply Curve
- The quantity supplied by the entire industry at each price point.
- The sum of the quantities supplied by all firms in the industry
- Note that at the shut-down point, the supply curve is a horizontal line that goes back to the
Long Run Exit and Entry
- In the long run, and industry adjusts in two ways
o Entry and exit
o Changes in plant size
A firm will exit an industry if Price < Average Total Costs. This is because it is making Economic Losses as
Firms will enter the industry if Price > A