Microeconomics Draw a perfectly competitive firm, showing zero economic profit.$MC ATCAVCAC, P1 MR, D Q Q1 (profit maximizing quantity)Why is the marginal revenue for a perfectly competitive firm horizontal? They're price takers.Marginal revenue:Additional revenue for selling one more unit of a product.For there to be zero economic profit, where do you draw the average total cost curve?- Curve with lowest point at the intersection of MC and MR.TR = P x Q = P1 x Q1TC = AC x Q = AC x Q1Why in the long run must a perfectly economic firm have zero economic profit?If a firm is making a lot of profit, then more firms will come in, price will go down, and economic profit will go to zero. There are no barriers to entry.Show a perfectly competitive firm earning positive economic profit. (short run only!)$ MC ATC P1, MR1ATC Q Q1AC x Q has to be less than Shaded = profit Zero economic profit – You are earning your opportunity cost.Economic profit – You are earning more than your opportunity cost.P.C. Economic Profit Loss$ MC ATCATC1 MRP1 QSquare = LossCharacteristics of market structure in PC: Buyers and sellers are informed Easy of entry/exit All products are homogeneous Zero economic profit in the long
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