Comparable to any profit-maximizing firm, a perfectly competitive firm produces the quantity of output in the short run that generates the maximum difference between total revenue with total cost, which is economic profit. At this production level, the firm cannot increase profit by changing the level of production. The analysis of profit can be achieved through a table of numbers or by a comparison of total revenue and total cost curves.

Working the Numbers

Because the zucchinis Phil produces are identical to those produced by gadzillions of other zucchini growers, he has no market control and must sell his zucchinis at the going market price of $4 per pound. Phil is a price taker. Phil's status as a perfectly competitive, price-taking firm is reflected in this table.

The Zucchini Numbers

• Quantity: The first column presents the quantity of output produced, ranging from 0 to 10 pounds of zucchinis.


• Total Revenue: The second column presents total revenue, ranging from a low of $0 for no output to a high or $40 for 10 pounds of zucchinis. If Phil sells 1 pound of zucchinis, he receives $4 in total revenue. Total revenue is $8 for 2 pounds of zucchinis. The total revenue in the second column is the $4 market price times the quantity of zucchinis sold.


• Total Cost: The third column presents the total cost incurred by the firm in the production of this output, ranging from a low of $3 for zero output to a high of $46 for 10 pounds of zucchinis. Because Phil has fixed cost, he incurs $3 of total cost even though he produces no zucchinis. Producing 1 pound of zucchinis incurs a total cost of $8. Producing 2 pounds of zucchinis incurs a total cost of $11. Total cost rises as Phil produces more.


• Profit: The fourth column at the far right of the table is available to display economic profit, the difference between total revenue in the second column and total cost in the third column. A click of the [Profit] button displays Phil's economic profit in the fourth column.

A click of the [Incurring Losses] button indicates that Phil incurs an economic loss for the first 3 pounds of zucchinis. Producing and selling 1 pound of zucchini generates an economic loss of $4. Total revenue is $4 and total cost is $8. A $3 loss results from 2 pounds of zucchinis. In fact, Phil also incur an economic lose by producing 10 pounds of zucchinis.

But loss is not what Phil seeks. Click the [Earning Profits] button to highlight the range of production levels that generate positive economic profit. Phil initially turns his profit picture around with 4 pounds of zucchinis. At 4 pounds of zucchinis Phil's total revenue is less than his total cost by $1.50. Profit remains positive through the production of 9 pounds of zucchinis, Phil's total revenue exceeds his total cost and Phil receives an economic profit. For 6 pounds of zucchinis, this profit is $6, for 7 profit is $7, and for 8 profit drops back to $6 again.

So what is the profit-maximizing level of zucchini production Phil should undertake? The desired production level is clearly not 3 pounds or less, nor is it 10 pounds (or more), all of which lead to economic loss. It must be within the highlighted range between 4 and 9.

The quantity that generates the greatest of economic profit is 7 pounds of zucchinis. This alternative can be highlighted by clicking the [Profit Max] button. The production of 7 pounds of zucchinis results in $28 of total revenue and $21 of total cost, a difference of $7. No other production level generates a greater economic profit. Producing 1 more pound of zucchinis or 1 less pound of zucchinis reduces profit to $6.

Working the Curves

The Zucchini Curves

• Total Revenue: The straight green line labeled TR depicts the total revenue that Phil receives from zucchini production. The line is straight, with a constant slope, because the price is constant at $4.


• Total Cost: The curvy red line labeled TC represents the total cost that Phil incurs in the production of zucchinis. The shape is based on increasing, then decreasing marginal returns.


• Profit: The vertical difference between these two lines is economic profit. If the total revenue line is above the total cost line in the middle of the diagram, economic profit is positive. If the total revenue line is below the total cost line at the far right and far left, economic profit is negative. The profit curve can be displayed in the lower panel by clicking the button labeled [Profit Curve].

• First, profit is negative (that is, Phil incurs an economic loss) for small quantities of output where the profit curve lies below the horizontal axis. Phil does not want to produce in this range.


• Second, profit is positive for larger quantities of output where the profit curve rises above the horizontal axis. Phil does want to produce in this range.


• Third, profit then becomes negative once again for the largest quantities of output where the profit curve dips below the horizontal axis again.

Before leaving this graph, two other quantities can be highlighted. The profit curve intersects the horizontal axis (meaning profit is zero) at two quantities--about 3.5 pounds of zucchinis and just over 9 pounds of zucchinis. Click the [Breakeven] button to highlight these two output levels.