Competitive Firm and Cost Curves

How to read this

A competitive firm takes the market price as given, so its only choice is how much to produce. The rule: keep producing until marginal cost — the cost of one more unit, the rising MC line — climbs up to the price. Where the dashed price line crosses MC is the chosen output q*.

Whether that output is worth producing at all depends on two thresholds. If price falls below average variable cost (the shutdown price), every unit loses money on its own operating costs and the firm produces nothing. Between the shutdown price and average total cost's minimum (the break-even price), the firm produces at a loss — covering its variable costs and chipping away at fixed costs it would owe anyway.

The shaded rectangle makes the verdict visible: its width is the output, its height is the gap between price and average total cost, so its area is the profit — green when price sits above ATC, red when below. Slide the price across the two thresholds and watch the firm's decision flip.