Page 633 - Krugmans Economics for AP Text Book_Neat

figure 59.1

Profitability and the (a) Market Price = $18
Market Price Price, cost
of bushel
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 Minimum
choice is indicated by point E, correspon- average MC
ding to an output of 5 bushels. The aver- total cost
age total cost of producing 5 bushels is
E Section 11 Market Structures: Perfect Competition and Monopoly
indicated by point Z on the ATC curve, $18
corresponding to an amount of $14.40. 14.40 Profit MR = P = D
The vertical distance between E and Z 14 ATC
corresponds to the farm’s per-unit profit, Break- C Z
$18.00 − $14.40 = $3.60. Total profit is even
price
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- 0 1 2 3 4 5 6 7
ducing is indicated by point A, correspon- Quantity of tomatoes (bushels)
ding to an output of 3 bushels. The farm’s
per-unit loss, $14.67 − $10.00 = $4.67,
(b) Market Price = $10
is represented by the vertical distance
between A and Y. The farm’s total loss Price, cost
of bushel
is represented by the shaded rectangle,
3 × $4.67 = $14.00 (adjusted for
rounding error).
Minimum
average MC
total cost

ATC
$14.67 Y
14
Break- C
even Loss
price 10 MR = P = D
A

0 1 2 3 4 5 6 7
Quantity of tomatoes (bushels)

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