Lesson plans · AP Micro Unit 3 · MICRO 3.4, MICRO 3.5, MICRO 3.6, MICRO 3.7
Perfect Competition: The Price-Taking Benchmark
Essential question: If a firm has no power to set its own price, how does it decide how much to make, and why does its profit vanish in the long run?
2 × 50-minute periods · MICRO 3.4, MICRO 3.5, MICRO 3.6, MICRO 3.7 · prints clean with Cmd/Ctrl+P
Objectives
- Students will be able to explain why a price taker faces a horizontal demand curve where P = MR = AR.
- Students will be able to draw the side-by-side market-and-firm graph and locate the firm's profit-maximizing quantity at P = MC.
- Students will be able to calculate economic profit or loss as (P - ATC) x Q and shade it correctly.
- Students will be able to apply the shutdown rule (produce if P is at least AVC) and distinguish it from the long-run exit rule (exit if P is below ATC).
- Students will be able to trace long-run adjustment through entry and exit to P = minimum ATC with zero economic profit.
Materials (all free, no student accounts needed)
Warm-up (8 min)
- Project: 'A Kansas wheat farmer tries to charge 5 cents above the $7 market price. What happens to his sales?' Students write a one-line prediction (zero sales) and the term for this kind of firm (price taker).
- Cold-call around the room to build a running board list of the four conditions of perfect competition: many small firms, identical products, full information, free entry and exit.
Direct instruction (30 min)
- Draw the side-by-side graph: market S and D on the left set P = $7; carry that price across as the firm's horizontal demand = MR = AR line on the right.
- State that for a price taker P = MR, so the MR = MC rule becomes P = MC; find the firm's quantity at the P = MC intersection, not at minimum ATC.
- Walk the three short-run cases against the ATC and AVC curves: P greater than ATC (economic profit rectangle), AVC less than P less than ATC (produce at a loss), P below AVC (shut down).
- Run the module's restaurant shutdown numbers ($5,000 rent, $8,000 revenue, $7,000 variable cost) to show staying open loses $4,000 while closing loses the full $5,000, so operating is less bad.
- Tell the long-run story: profits attract entry, market supply shifts right, price falls to minimum ATC, and economic profit goes to zero; losses trigger exit and the reverse.
Guided practice (32 min)
- Project /sandbox/perfect-competition; the market graph is on the left and the firm's cost curves plus an auto-shading profit/loss rectangle are on the right, with a profit/loss readout strip beneath the firm graph that names the case as Economic Profit, Economic Loss, or Normal Profit.
- Drag the market Demand curve to the right. Cold-call: what happened to the price, and read the strip below the graph aloud (it flips to Economic Profit while the shaded rectangle itself just reads Profit). Ask what this profit will attract (entry).
- Drag Demand back to the left until the strip reads Economic Loss and the shaded rectangle flips to Loss. Ask a student whether the firm shuts down yet (only once price drops below minimum AVC).
- Send a student to drag Demand until the strip reads Normal Profit, at which point the shaded rectangle vanishes because economic profit is near zero; then identify the price (minimum ATC) and the economic profit (zero) and connect this to long-run equilibrium.
- Think-pair-share: pairs write the full entry sequence that moves the market from Economic Profit back to Normal Profit. Take one response and correct it.
Independent practice (25 min)
- Students complete the set at /practice/perfect-competition, prioritizing the shutdown item (P = $14, AVC = $12, ATC = $18) and the profit-calculation item (P - ATC) x Q.
- Each student then draws a labeled side-by-side graph for a firm earning short-run economic profit and annotates what changes in the long run.
Exit ticket
- A firm has P = $14, AVC = $12, ATC = $18. Should it produce or shut down in the short run, and why?
- Draw the individual firm's demand curve and label it correctly as horizontal at P = MR = AR.
- In one sentence, explain why zero economic profit in long-run equilibrium is not the same as the firm failing.
- Compute economic profit if P = $20, ATC = $15, and Q = 500.
Homework
- Read the Long-Run Equilibrium and Efficiency sections and write two sentences each on allocative efficiency and productive efficiency.
- Finish /practice/perfect-competition and flag the shutdown item for next class's warm-up review.
Differentiation
- Support: give a partially labeled side-by-side graph so students place only the price line and the P = MC quantity.
- Stretch: have advanced students solve the algebra worked example (P = $40, MC = 5 + 1.5Q) for quantity and profit, then redo it at P = $28.
- Keep the sandbox projected during independent practice so students can self-check whether their profit rectangle matches the price they chose.
Misconceptions to head off
- Students think a firm losing money should shut down whenever P is below ATC. Correction: shut down only if P is below AVC; between AVC and ATC keep producing to cover part of the fixed costs.
- Students read zero economic profit as the firm going broke. Correction: it means all costs including opportunity cost are covered and the firm earns a normal return.
- Students draw the individual firm's demand curve sloping downward. Correction: only the market demand slopes down; the price taker's own demand is horizontal at P, and readers dock this every year.
- Students pick the quantity at minimum ATC as profit-maximizing. Correction: profit is maximized at P = MC, which is usually a different quantity than minimum ATC.
Teacher FAQ
- Does this really need two periods?
- Yes. Day 1 is price-taking, P = MC, and the short-run profit/loss/shutdown cases; Day 2 is the long-run entry-and-exit story and efficiency. The side-by-side graph is worth slowing down for.
- What is the prerequisite?
- The full cost-curve family from the Production and Costs module. Students who cannot draw MC through minimum ATC will struggle to place the firm's equilibrium, so teach this right after Topic 3.2.
- How strict should I be on the exit-ticket graph?
- On the AP rubric the price-taker's demand must be horizontal and profit maximization must be at P = MC. Dock the point for a downward-sloping firm demand curve; that is the single most common error readers see.
Assign this without the grading
A free pilot semester gets you the teacher dashboard: assign the module and practice set from this plan, run lockdown exams, and see per-student progress. Students never pay either way.
Start your free pilot