Consider the firm whose data are graphed to the right. This firm is producing at capacity, where ATC is minimized. This is clearly the level of output for which the production facility was designed, the level at which average production costs are minimized, hence the term "capacity."

    But, with free entry this situation can't exist in the long run. A quick check shows that this firm is earning profits shown by the shaded area, meaning owners are earning more than in their next best alternative.

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