|Profit maximization for the price-taking firm
Profit = total revenue – total cost
Profit will be maximized when the difference between TR and TC is the greatest.
In other words, at max-profit output, Qπ, marginal profit (i.e., ∆profit/∆output) is equal to zero.
By definition, marginal profit = marginal revenue –
Maximum-profit output for price taker
When the seller can sell as much as he wants at a constant price, the total revenue curve (TR) is a straight line from the origin.
Since price is constant, MR is equal to price (P) because:
For a price taker, therefore, at its max-profit output Qπ, P = MR = MC.
Measuring profit with P (Price) and ATC under horizontal demand
With P and ATC, the distance between P and ATC represents profit per
When P is equal to minimum ATC, total profit is zero.
When P is equal to minimum AVC, TR covers only TVC, with nothing left over to cover fixed cost. Since fixed cost is irrecoverable sunk cost in the short run, the firm is indifferent between staying in business and quitting altogether. Therefore, minimum TVC is known as the shut down point for a perfectly competitive firm.