Firm and Market Lab

See a whole market and one firm in it side by side. Shift market demand and the price carried across to the firm moves its d = MR = AR = P line; the firm produces where that line meets MC, and its profit or loss appears as a shaded box. Then run the long run: firms enter or exit until the price is back at the minimum of ATC. Switch to a monopoly or a monopolistically competitive firm to find the quantity where MR = MC, go up to demand for the price, and box the profit.

What the model is

Every picture is drawn the way the exam scores it, from one set of cost curves, so MC always crosses ATC and AVC at their lowest points.

• Perfect competition. The market sets the price where demand meets supply. Each firm is a price taker: its demand is the horizontal line d = MR = AR = P at that price, and it produces where P = MC. Profit or loss is (P − ATC) × q. With profits, firms enter and market supply shifts right; with losses, firms exit and supply shifts left, until P = minimum ATC (a constant-cost industry).
• Shutdown. In the short run a firm keeps producing while P covers AVC; below the minimum of AVC it shuts down and loses only its fixed cost.
• Monopoly. Demand slopes down and MR lies below it. Produce where MR = MC, then go up to demand for the price. P > MC, so there is deadweight loss.
• Monopolistic competition. Like a monopoly in the short run; in the long run entry shifts each firm's demand left until it is tangent to ATC: zero profit, P > MC and excess capacity.

Test yourself gives price-taker tables, shutdown decisions, the long-run chain with every link, monopoly tables and monopolistic competition, each step checked on its own.

Notes for this topic: Perfect Competition