(8th edition) (the pearson series in economics) robert pindyck, daniel rubinfeld microecon 313

288 PART 2 • Producers, Consumers, and Competitive Markets

MC
Price
(dollars per
unit)

60

50
Lost profit for
q1 < q*

D
40

Lost profit for
q2 > q*
A

AR = MR = P
ATC

C
AVC

B

30

20

10

0

1
q0

2

3

4

5

6

7

8

9

q1

q*

q2

10

11
Output

F IGURE 8.3

A COMPETITIVE FIRM MAKING A POSITIVE PROFIT
In the short run, the competitive firm maximizes its profit by choosing an output q* at which its
marginal cost MC is equal to the price P (or marginal revenue MR) of its product. The profit of the
firm is measured by the rectangle ABCD. Any change in output, whether lower at q1 or higher at q2,
will lead to lower profit.

state the condition for profit maximization as follows: Marginal revenue equals
marginal cost at a point at which the marginal cost curve is rising. This conclusion
is very important because it applies to the output decisions of firms in markets that may or may not be perfectly competitive. We can restate it as follows:
Output Rule: If a firm is producing any output, it should produce at the level
at which marginal revenue equals marginal cost.
Figure 8.3 also shows the competitive firm’s short-run profit. The distance AB
is the difference between price and average cost at the output level q*, which is
the average profit per unit of output. Segment BC measures the total number of
units produced. Rectangle ABCD, therefore, is the firm’s profit.
A firm need not always earn a profit in the short run, as Figure 8.4 shows.
The major difference from Figure 8.3 is a higher fixed cost of production. This
higher fixed cost raises average total cost but does not change the average
variable cost and marginal cost curves. At the profit-maximizing output q*,