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Understanding Price, Costs, and Economic Profit in Market Equilibrium

This article explores the concepts of price and costs in relation to marginal cost (MC), average total cost (ATC), and average variable cost (AVC) within market dynamics. It discusses the conditions for profit and loss in short-run and long-run equilibria, emphasizing when firms should shut down operations if they cannot cover variable costs. Key points include the relationship between price, demand (P.D.), marginal revenue (MR), and average revenue (AR), and the implications for quantity produced at various price levels.

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Understanding Price, Costs, and Economic Profit in Market Equilibrium

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  1. QMAX Price/Costs MC ATC P D = MR = AR PROFIT AVC Quantity

  2. QMAX Price/Costs MC ATC AVC LOSS P D = MR = AR Quantity

  3. QMAX Long run Equilibrium: Economic Profit = Zero Price/Costs MC ATC AVC P D = MR = AR Quantity

  4. QMAX Price/Costs MC ATC AVC LOSS Not covering Variable costs. SHUT DOWN! P D = MR = AR Quantity

  5. QMAX Shut down point: P = Min AVC Price/Costs MC ATC AVC P D = MR = AR Quantity

  6. Price/Costs MC ATC AVC P Quantity

  7. Price/Costs MC ATC AVC P Quantity

  8. Price/Costs MC ATC AVC P Quantity

  9. Price/Costs MC ATC AVC P Quantity

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