Question

Indicate on the following graph of perfect competition:
Q*, TR, TC, MR, MC, AR, AC, P, π, STSP (short-term shutdown point) and LTSP (long-term shutdown point).

Answer 1

A perfectly competitive firm produces where the marginal cost equals the marginal revenue , this is where the price and the quantity are determined. The perfectly competitive firm is a price taker , they do not have any kind of market power to alther the price. If they increase their the quantity demanded will fall to zero , this makes the demand for the perfectly competitive firm perfectly elastic. So the price is equal to the marginal and the average revenue. In the short run the firm shutdown point is where the price equals the avergae variable cost , if the price goes below the average variable cost the firm should shutdown the production. In the long run, the shutdown point is where the price equals the average total cost.  

The total revenue is price multiplied by the quantity sold.

MC ATC Total revenue AVC Price P P=AR=MR X Q* Quantity

MC ATC Total cost AVC Price P P=AR=MR X Q* Quantity

The total cost average total cost multiplied by the quantity.

.

TC= ATC XQ

The difference between the total revenue and the total cost is the profit .

MC ATC AVC Profit (Negative) Price P P=AR=MR X Q* Quantity

MC ATC AVC LTSP= (P=ATC) Price LTSP STSP =(P=AVC) P P=AR=MR STSP X Q* Quantity