The one and only characteristic of short run equilibrium is as follows:
To maximize profit, set MR = MC!
[Note: Since P = MR in the perfectly competitive model (due to the horizontal demand curve), then the profit-maximizing condition for perfect competition is also P = MC.]
Why?
There's a very simple mathematical explanation that I'm not willing to share in a "public" forum. Christian, I'll chat with you at home about this concept, and the accompanying graphs. Love you, mom
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Be sure you also understand that any of the three situations (below) will also be true when the firm is maximizing profit in the short run.
1. economic profit > 0
2. economic profit < 0
3. economic profit = 0
What's the significance of knowing the amount of economic profit?
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Answer: The existence of economic profit (whether it's positive, negative, or zero) has such a dynamic effect on an industry and thus, an economy. The value of economic profit signals either entry, exit, or long-run equilibrium. For a continued explanation of the market adjustment process resulting in long-run equilibrium, please see the next topic. Something to consider at this point in the course: Exactly what does economic profit = 0 mean for the firm, and the industy? Be specific in your answer. [An aside: Christian, We'll talk about the short-run "shut-down rule" at home instead of online. Love you, mom]
