AP_Krugman_Textbook

The height of the shaded rectangle in panel (a) corresponds to the vertical distance
between points E and Z.It is equal to P −ATC=$18.00 −$14.40 =$3.60 per bushel.
The shaded rectangle has a width equal to the output: Q= 5 bushels. So the area of
that rectangle is equal to Jennifer and Jason’s profit: 5 bushels ×$3.60 profit per
bushel =$18.
What about the situation illustrated in panel (b)? Here the market price of toma-
toes is $10 per bushel. Producing until price equals marginal cost leads to a profit-
maximizing output of 3 bushels, indicated by point A.At this output, Jennifer and
Jason have an average total cost of $14.67 per bushel, indicated by point Y.At their

module 59 Graphing Perfect Competition 591

Section

(^11)
(^) Market
(^) Structures:
(^) Perfect
(^) Competition
(^) and
(^) Monopoly
figure 59.1
Profitability and the
Market Price
In panel (a) the market price is $18. The
farm is profitable because price exceeds
minimum average total cost, the break-
even price, $14. The farm’s optimal output
choice is indicated by point E,correspon-
ding to an output of 5 bushels. The aver-
age total cost of producing 5 bushels is
indicated by point Zon the ATCcurve,
corresponding to an amount of $14.40.
The vertical distance between Eand Z
corresponds to the farm’s per-unit profit,
$18.00 −$14.40 =$3.60. Total profit is
given by the area of the shaded rectangle,
5 ×$3.60 =$18.00. In panel (b) the
market price is $10; the farm is unprof-
itable because the price falls below the
minimum average total cost, $14. The
farm’s optimal output choice when pro-
ducing is indicated by point A,correspon-
ding to an output of 3 bushels. The farm’s
per-unit loss, $14.67 −$10.00 =$4.67,
is represented by the vertical distance
between Aand Y.The farm’s total loss
is represented by the shaded rectangle,
3 ×$4.67 =$14.00 (adjusted for
rounding error).
76543210
Price, cost
of bushel
Quantity of tomatoes (bushels)

MC

Profit ATC

MR = P = D

C Z

E

Minimum

average

total cost

76543210

Price, cost

of bushel

Quantity of tomatoes (bushels)

MC

Loss

ATC

MR = P = D

C

A

Y

(a) Market Price = $18

(b) Market Price = $10

14

14.40

14

10

$14.67

$18

Break-

even

price

Break-

even

price

Minimum

average

total cost