Figure 9-8 Alternative Short-Run Profits of a Competitive Firm
Figure 9-8 shows three possible positions for a firm when the industry is
in short-run equilibrium. In all cases, the firm is maximizing its profits by
producing where price equals marginal cost, but in part (i) the firm is
suffering losses, in part (ii) it is just covering all of its costs (breaking
even), and in part (iii) it is making positive profits. In all three cases, the
firm is doing as well as it can, given its costs and the market price.
When the industry is in short-run equilibrium, a competitive firm may
be making losses, breaking even, or making profits. The diagrams show
a firm with given costs that face three alternative short-run equilibrium
market prices: and Because in all three cases price exceeds the
minimum of AVC, the firm produces positive output in each case.
In part (i), price is and the firm is making losses, shown by the shaded
area, because price is below average total cost. Because price exceeds
average variable cost, it is worthwhile for the firm to keep producing. In
part (ii), price is and the firm is just covering its total costs. In part (iii),
price is and the firm is earning profits, shown by the shaded area.
p 1 ,p 2 , p 3.
p 1p 2
p 3