Tutorial: Profits -- a Perfectly Competitive Firm

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  Competitive Price:
  Output choice:

In the diagram above, notice that with a market price of $50.00, the firm is producing 4 units of output and earning $0 (abnormal) profits.

Adjust the Output choice slider left or right. You will find that any other output level results in losses.

Suppose that the market price increases to $65.00 (adjust the Competitive price slider to the right. The firm is now earning a profit of $60.00. Adjust your output level to increase, and ideally maximize, profits.

You will notice that at a level of output of 5 units, profits are maximized at just over $66.00. In the diagram you will find that this level of output corresponds with P = MC, our profit maximizing condition. Increasing output further or reducing output to less than 5 units will lead to a reduction in profits.

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