You can see this in the following derivation using

This preview shows page 13 - 17 out of 21 pages.

it shuts down. You can see this in the following derivation using total revenue (), total fixed cost (TFC), total variable cost (TVC), average variable cost (), price (), and quantity ():
Therefore, the firm's shutdown point occurs when . Since a perfectly competitive firm always chooses the quantity at which (if it produces), this must correspond to the intersection of the and curves. In this case, the firm's minimum is $20 per shirt. Therefore, if the market price is less than $20, the firm maximizes its profit by shutting down in the short run. If the market price is more than $20, the firm maximizes its profit by producing in the short run. If the market price is exactly $20, the firm is indifferent between producing and shutting down.Profit is the difference between total revenue and total cost. Breaking this down further yields the following result:Because a perfectly competitive firm sets , this means that the firm earns a positive profit if , breaks even (earns zero profit) if , and is operating at a loss if
.On the following graph, use the orange points (square symbol) to plot points along the portion of the firm's short-run supply curve that corresponds to prices where there is positive output. (Note: You are given more points to plot than you need.)
Suppose there are 10 firms in this industry, each of which has the cost curves previously shown.On the following graph, use the orange points (square symbol) to plot points along the portion of the industry’s short-run supply curve that corresponds to prices where there is positive output. (Note: You are given more points to plot than you need.) Then, place the black point (plus symbol) on the graph to indicate the short-run equilibrium price and quantity in this market.Note: Dashed drop lines will automatically extend to both axes.
For prices at and above the shutdown point of $20, the industry's supply curve corresponds to the horizontal summation of all firms' marginal cost curves. For example, at $50, each firm will produce 40,000 shirts, so the industry supply at this price is The short-run equilibrium price and quantity occur at the intersection of the market demand and supply curves, which occurs at a price of $40 and a quantity of 375,000 shirts.At the current short-run market price, firms willproduce in the short run. In the long run,some firms will exit. The supply and demand curves intersect at a price of $40 per shirt. This corresponds to a point on the marginal cost curve that is below each firm's average total cost curve. Therefore, in the short run,
.

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture