Profit maximization

Level of output is at :

MC=P=MR

In short run,

• Price takers can make profit (P – ATC.)*Q

In Long run,

• No price taker makes an economic profit due to the competition pressures, P = LRATC.

For individual price taker, when ATC curve falls below P {market demand curve is a horizontal line at market price, P}, it can make a profit (p):
p = TR-TC

When ATC curve lies above P, economic loss is resulted and the firm faces three choices:

• If the AVC curve falls below P and the situation is temporary, the firm is covering its variable costs and should continue operating in the short run.
• If the AVC curve lies entirely above P but the situation is temporary, the firm is not covering variable costs and should shut down temporarily.
• If the firm believes that the ATC will never fall below P, then it should go out of business.

Note:

• Zero economic profit does not mean that the company is making no accounting profit.