Week 7: Interactive Visualizations

Fig 7.1 Profit Landscape (TR vs TC)

The firm earns profit wherever TR > TC. Drag the price slider to change the slope of the TR line (revenue from each unit sold). The vertical gap between TR and TC is shaded green when positive and red when negative. The bottom panel shows the profit curve directly. Drag the vertical cursor to see MR vs MC at any quantity, and find q* where the slopes are equal (MR = MC).

Total Revenue (TR) vs Total Cost (TC)

Profit π(q) = TR − TC

Market Price P*: $10.00

Fixed Cost TFC: $5

Variable Cost shift: 0

Key insight: The firm maximizes profit where MR = MC (the revenue from one more unit exactly equals its cost). To the left of q*, MR > MC (produce more). To the right, MC > MR (cut back).

Fig 7.2 Profit Rectangle Anatomy

The profit rectangle has height = P* − SAC(q*) and width = q*. The area = total profit. Use the price slider to change P*. Toggle "Show Common Mistakes" to see ghost rectangles using SAVC or SMC as the bottom edge (both wrong).

Market Price P*: $7.00

Fig 7.3 Shutdown Decision Zone Map

Use the price slider to set P*. The colored zone shows whether the firm should shut down, operate at a loss, break even, or earn positive profit. The algebraic proof of the shutdown rule (right) always stays visible: it never changes. What changes is the price you choose, and therefore which zone (and which decision) applies.

Algebraic Proof: When to Produce (this logic never changes, only the price below does)

Produce if operating loss < shutdown loss:

Step 1: Profits > −TFC → keep producing

Step 2: TR − TVC − TFC > −TFC

Step 3: TR − TVC > 0 → TR > TVC

Step 4: P·q > AVC·q

Conclusion: P > AVC ✓ produce whenever price covers average variable cost; shut down otherwise.

Market Price P*: $6.00

Fig 7.5 Supply Curve Emergence

Watch the price sweep upward from zero. Below the shutdown price (min SAVC = $4), the firm supplies nothing. Once price crosses $4, the SMC curve becomes the supply curve and each (q, P) point traces out in the right panel—building the supply curve dot by dot.

The core idea: how we get a supply curve out of a cost curve.

Pick a price P.
The firm maximizes profit by producing where MC = P (the profit-maximizing rule).
That intersection pins down a specific quantity q.
Plot the point (q, P): that's one point on the firm's supply curve.
Repeat for every price … and the dots you trace out land exactly on the SMC curve.

That's why the marginal cost curve (above the shutdown point) is the firm's supply curve: profit-maximization (MC = P) directly maps each price to the quantity the firm will supply at that price.

Fig 7.7 Three-Panel Demand Shock

The market mechanism has three linked panels: the typical firm (left), the market (center), and the typical consumer (right). Choose a shock scenario and click through the steps to see how causality flows from consumer to market to firm.

Choose a scenario and click through the steps to trace the causal chain.

Fig 7.8 Market Supply Builder

Market supply is the horizontal sum of all individual firm supply curves: at each price, add up the quantities each firm wants to supply. Adjust the number of firms to see exactly how the arithmetic works.

Number of firms n: 10

Key insight: At each price, add quantities across all firms; never add prices. If each of n identical firms supplies q units, market supply is Q = n × q. The market supply curve is flatter (more elastic) than any individual firm's supply curve and shifts right as n grows.

Fig 7.9 Long-Run Entry/Exit Machine

Start with 150 firms earning a healthy profit (P* ≈ $6.40 > SAC, green rectangle visible). Click "Run Entry" to watch new firms enter, market supply shift right, price fall, and the profit rectangle shrink toward zero at long-run equilibrium (n ≈ 297, P* ≈ $5.51 = minimum SAC). Click "Run Exit" to start instead from an industry with too many firms (n = 450): price is below SAC, the rectangle turns red (a loss), and firms exit until the same zero-profit equilibrium is reached from above.

Market (Supply and Demand)

Firm (Profit Rectangle)

Zero economic profit is healthy: it means the firm earns exactly its opportunity cost. Owners are compensated fairly, just not earning excess returns.

Profit Maximization & the Competitive Firm