Suppose that firm j is perfectly competitive.

Case 1) If the market price P_mkt is greater than the minimum of firm j's average total cost (ATC) curve, then firm j maximizes its short run (SR) profits at the output level, denoted Q_j*, that satisfies the condition: marginal revenue equals marginal cost (MR = MC). In this case, firm j's SR profits at Q_j* are positive and equal to [Pmkt - ATC(Q_j*)] x Q_j* > 0, where ATC(Q_j*) denotes average total cost at Q_j*. Note that if P_mkt equals the minimum of the ATC curve (P_mkt = ATC(Q_j*)), then firm j's SR profits at Q_j* are zero and firm j is said to be at its SR break-even point.

Case 2) If the market price P_mkt is between the minimum of the average variable cost (AVC) curve and the minimum of the ATC curve (i.e., min AVC < P_mkt < min ATC), then a firm j maximizes its SR profits (i.e., minimizes its loss) at the output level Q_j* that satisfies the condidtion MR = MC. In this case, firm j's SR profits at Q_j* are negative but its loss at Q_j* is less than its loss if firm j were to shut down and produce zero output, the latter of which would be equal to its total fixed costs, TFC. That is, -TFC < j's SR profits at Q_j* = [P_mkt - ATC(Q_j*)] x Q_j* < 0.

Case 4) If the market price P_mkt is less than the minimum of the AVC curve, then firm j maximizes its SR profits (i.e., minimizes its SR losses), at 0 (zero) output. If Q_j' is the quantity that satisfies MR = MC, then j's SR loss at Q_j'is greater than its SR loss at 0 output, which is equal to -TFC. Thus, the loss (negative profits) are minimized at 0 instead of at the quantity where MR = MC.That is, j's SR profits at Q_j' < j's SR profits at 0 output = -TFC < 0.