Perfect Competition – Short-Run Loss
Microeconomics
A diagram illustrating a perfectly competitive firm's short-run position where price equals average revenue but is below average total cost, resulting in a loss.
Curves and Elements
ar mr
AR = MR: Perfectly elastic demand curve faced by a price-taking firm.
mc
Marginal Cost (MC): The cost of producing one more unit — intersects MR at the profit-maximizing output level.
avc
Average Variable Cost (AVC): The firm's variable cost per unit. The firm stays open as long as price > AVC.
q
Quantity (Q): The profit-maximizing output where MC = MR.
p
Price (P): Set by the market; the firm takes this as given.
shutdown condition
Shutdown Rule: The firm continues to operate in the short run if P ≥ AVC, even if it incurs losses.
In perfect competition, firms are price takers and face a perfectly elastic demand curve (AR = MR).
The firm maximizes profit (or minimizes loss) where marginal cost (MC) intersects marginal revenue (MR).
In this diagram, the firm produces at quantity Q, where MC = MR, and sells at price P.
Since the average variable cost (AVC) is below price, the firm continues to operate in the short run to cover its variable costs.
However, the average total cost (ATC) is above the price, so the firm is making a loss in the short run.
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