For a perfectly competitive firm, profit exists in the short run but is eliminated in the long run. In the short run, a firm
determines profit by determining whether the average revenue curve is above the average total cost curve. The vertical
distance between the two curves indicates the per-unit profit. To get the total profit, we would have to multiply per-unit
profit by quantity. The profit range is illustrated in Figure 10-5 figure below in the shaded region of the graph.
Figure 10-5We can assume that this is a short-run condition because perfectly competitive firms have no long-run profit. By look-
ing at the graph in Figure 10-6, we can see two things. First, a profit exists; second, the graph is a representation of a
perfectly competitive firm. With these two observations, we can assume that the graph is a short-run illustration.
In the long run, other firms become attracted by the profit and, as a result, increase the supply in the industry. When the
market supply is increased, the market price declines, thereby eliminating any profit.
A firm can operate with its average cost greater than its average revenue even though it is incurring a loss. As long as
the firm’s price is higher than its average variable cost, the firm can operate in the short run to minimize losses. If in
the long run this continues, the firm will shut down.
Mini-Review
- Which of the following is a characteristic of a perfect competition?
A. Few firms in the industry
B. Many firms in the market
C. Great degree of price control
D. Plenty of profit
E. Many substitutes - What is the role of profit in a perfectly competitive firm?
A. There is never profit.
B. There is profit in the beginning and no profit in the long run.
C. There is always profit.
D. Depending on the firm’s ability to set its prices, there will be profit.
E. There is no profit in the beginning but there is a profit in the long run.
MCProfit ATCp^1p^2p^3(^0) Q (^1) Q 2
Product Markets and Profit Maximization