Figure 9-7 A Typical Firm When the Competitive Market Is in Short-
Run Equilibrium
see that the firm’s profits are positive because the market price exceeds
average total costs when the firm is producing its profit-maximizing level
of output. But such positive profits need not always occur in the short
run. In general, we do not know whether firms in the short-run
competitive equilibrium will be earning positive, zero, or negative profits.
We do know that each firm is maximizing its profits; we just don’t know
how large those profits are.
Short-run equilibrium in a competitive market has a market-clearing
price and each firm is maximizing its profits. Part (i) shows the overall
market. The equilibrium price and quantity are determined at
the intersection of the market demand and supply curves at point E. Part
(ii) shows a typical firm in the market. Notice that the horizontal scales
are different in the two parts of the figure—total market output is
designated by Q, whereas firm-level output is designated by q. The
equilibrium price in part (i) becomes the MR curve for each firm in the
market. Given its MC curve, the firm’s profit-maximizing level of output is
In the case shown, the firm is making positive profits equal to the
shaded area.
(p∗, Q∗)q∗.