covering its variable costs. In this case, staying open is making the firm’s losses larger, and it should shut down

immediately. To summarize, if:

• price < minimum average variable cost, then firm shuts down

• price > minimum average variable cost, then firm stays in business

Short-Run Outcomes for Perfectly Competitive Firms

The average cost and average variable cost curves divide the marginal cost curve into three segments, as

Figure 8.7 shows. At the market price, which the perfectly competitive firm accepts as given, the profit-

maximizing firm chooses the output level where price or marginal revenue, which are the same thing for a

perfectly competitive firm, is equal to marginal cost: P = MR = MC.

FIGURE 8.7 Profit, Loss, Shutdown We can divide the marginal cost curve into three zones, based on where it is

crossed by the average cost and average variable cost curves. We call the point where MC crosses AC the break even
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