Note in all three cases that the competitive firm’s profit per unit is shown
by the difference between price and average total cost. To see this
algebraically, note that the firm’s total profits are
So, profit per unit is given by whereas the firm’s total profit (or
loss) associated with the production of all Q units is
is illustrated by the shaded rectangles in Figure 9-8.
It is worth repeating that some firms will choose to continue producing
even though they are making losses. The firm shown in part (i) of Figure
9-8 is incurring losses every period that it remains in business, but it is
still better for it to carry on producing than to temporarily halt
production. If the firm produces nothing this period, it still must pay its
fixed costs, so it makes sense to continue producing as long as its
revenues more than cover its variable costs or, equivalently, as long as
price exceeds AVC. Any amount of money left over after the variable costs
have been paid can then go toward paying some of the fixed costs. This is
more than the firm would have if it simply produced nothing and hence
earned no revenue whatsoever. (Look back to Table 9-1 to see an
example of this situation, in the case where market price is $5 per unit.)
Applying Economic Concepts 9-2 discusses an interesting example of a
firm that remains in operation even though it is making losses. You would
Profits = TR−TC
= (p×Q)−(ATC×Q)
= (p−ATC)×Qp−ATC,
(p−ATC)×Q,