1. Ajax Company Scenarios for a Firm in Perfect Competition

2. Table of Contents • Find Total Fixed Cost • Normal Profit • Economic Loss • Stay in Business • Shut Down Point • Shut Down • Cost Curves • Profit-Maximization • Find Total Revenue on a Graph • Find Total Cost on a Graph • Economic Profit • Find Total Variable Cost on a Graph

3. Ajax Company Cost Schedule

4. MC ATC AVC

5. Suppose the market equilibrium price is $180.Since the firm in perfect competition is a price taker, it can charge no more than the market equilibrium price.

6. P = MR = AR and the firm’s demand curve will be perfectly elastic at the market equilibrium price.

7. Ajax Company Data

8. The firm’s demand curve will be perfectly elastic at the market equilibrium price of $180 and MR and AR will both be $180.

9. MC ATC D = MR = AR AVC

10. Find the Profit Maximizing Quantity by Finding where MR=MC.

11. MC MC=MR ATC D = MR = AR AVC

12. Drop a Perpendicular LineDown to the Quantity Axis to Determine the Profit-Maximizing Quantity.

13. MC MR=MC ATC D = MR = AR AVC

14. To Find Total RevenueCompute P x Q

15. Ajax Company Data

16. To find Total Revenue for the Profit-Maximizing Quantity on the Graph, start at the quantity where MR=MC.

17. The Profit Maximizing Quantity is 7 units of output.The Price needed to sell 7 units of output can be found by going from 7 units of output on the output axis up to the Demand Curve.

18. MC ATC C D = MR = AR AVC D

19. The distance from the originto 7 units of output is Q.

20. MC ATC D = MR = AR AVC A D

21. Since the distance from 7 up to the Demand Curve is the Price and the distance from the origin to 7 units of output is Q, Total Revenue is P x Q or the height of a rectangle times its base or the area indicated by ABCD.

22. MC TR = ABCD ATC C B D = MR = AR AVC D A

23. To Find Total Cost Compute TC = ATC x Q.

24. Ajax Company Data

25. Find the ATC for 7 Units of Output by going from 7 units of output on the quantity axis up to the ATC curve.

26. MC ATC D = MR = AR AVC

27. Draw the Total Cost Rectangle by drawing a base of 7 units (this is Q) times the height which is the ATC for 7 units. It is the area AEFD.

28. MC TC = AEFC ATC D = MR = AR F E AVC A D

29. If Total Cost and Total Revenue are drawn on the same graph

30. MC TR = ABCE TC = AEFD ATC C B D = MR = AR E F AVC D A

31. TR - TC = Economic ProfitThis is the rectangle EBCF.

32. MC Economic Profit = EBCF ATC C B D = MR = AR P R O F I T E F AVC D A

33. Now let’s see the whole process again.

34. MC ATC C B D = MR = AR P R O F I T E F AVC D A

35. TVC = AVC x QFirst find AVC for the Profit-Maximizing Quantity

36. MC ATC D = MR = AR AVC

37. Then draw the AVC x Q = TVCrectangle.

38. MC TVC = AGHD ATC D = MR = AR AVC H G D A

39. AFC for the Profit-Maximizing Quantity is the vertical distance between ATC and AVC at 7 units of output.

40. ATC D = MR = AR F AVC H

41. TFC is the rectangle which has a height of AFC and a base of Q.

42. MC TFC = GEFH ATC D = MR = AR E F AVC H G

43. Notice that the Total Variable Cost rectangle plus the Total Fixed Cost rectangleequal the Total Cost rectangle.

44. Total Cost = AEFD MC ATC D = MR = AR E F AVC Total Fixed Cost G H Total Variable Cost D A

45. Now suppose the market demand decreases and the market equilibrium price falls to $140.

46. MC ATC AVC D=AR=MR

47. Find the Profit Maximizing Quantity by finding where MR=MC

48. MC ATC MR=MC AVC D=AR=MR

49. Drop a perpendicular line down to the quantity axis to find the Profit-Maximizing quantity. The Profit-Maximizing quantity is now 6 units of output.

50. MC ATC AVC D=AR=MR