5 Steps to a 5 AP Microeconomics, 2014-2015 Edition

Market Structures, Perfect Competition, Monopoly, and Things Between ‹ 125

What’s So Great About Breaking Even?

Remember there is a distinction between accounting profit and economic profit. Economic

profit subtracts the next best opportunity costs of your resources from total revenue. If you

are still breaking even after subtracting what you might have earned in all of those other

opportunities, you can’t feel cheated. In other words, you are making a fair rate of return

on your invested resources and you have no incentive to take them elsewhere. Sure, you

would like to earn more than zero economic profit (aka “normal profit”), but the charac-

teristics of perfect competition rule this out.

Short-Run Losses

Figure 9.8 illustrates short-run losses with a price below ATC but above the shutdown

point. The long-run adjustment story might sound familiar, only with market forces

moving in the opposite direction.

Again, we should ask “What next?” Some existing firms in this market begin to exit the

industry. With fewer carrot producers, the market supply curve shifts leftward, driving up

the price. As the price rises, the loss rectangle gets smaller and smaller until again it disap-

pears. At the point where PLR=MR =MC =ATC, each remaining carrot farmer is now

breaking even with P=0. Would another carrot farmer exit the market? Possibly, but the

exit of one more firm bumps up the price just enough so that a small positive profit is

earned, prompting one firm to enter and get us back to the breakeven point. Arrival at the

breakeven point is once again the long-run equilibrium. The market quantity has decreased,

but each surviving firm produces more at the higher price. Figure 9.9 illustrates the move-

ment toward the long-run equilibrium.

The long-run adjustment to short-run losses can be summarized as:

• Exit of existing firms prompted by economic P<0.


• Decrease in market supply.


• An increase in the market price to PLR.


• Profits increase to the breakeven point, PLR=MR =MC =ATC and economic P=0.


• Market quantity decreases.


• Individual producer output rises.

AVC

S = ΣMC

D

Quantity Quantity

Pe Pe d = Pe = MR = AR

$P $P

The U.S. Carrot Market One Carrot Producer

Qe qe

MC

AT C

Profit<0

Figure 9.8

TIP