short of total costs by the smallest amount). Alternatively, profits will be highest where marginal revenue,

which is price for a perfectly competitive firm, is equal to marginal cost. If the market price faced by a perfectly

competitive firm is above average cost at the profit-maximizing quantity of output, then the firm is making

profits. If the market price is below average cost at the profit-maximizing quantity of output, then the firm is
making losses.

If the market price is equal to average cost at the profit-maximizing level of output, then the firm is making

zero profits. We call the point where the marginal cost curve crosses the average cost curve, at the minimum of

the average cost curve, the “zero profit point.” If the market price that a perfectly competitive firm faces is

below average variable cost at the profit-maximizing quantity of output, then the firm should shut down
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