[MUSIC] What happens if the price of t-shirts drops and it's $3? The firm is still trying to maximize profit, so the firm was still produce when marginal revenue equals marginal cost. This is the quantity, that maximizes profits. But we can see in this case that the firm is not making a profit. Why? The revenue is $3 times the quantity, it is this rectangle here. And what about the cost? Well at this quantity, the average total cost is all the way up here, so the total cost of production exceeds the revenues. We can see in this case, that the firm is loosing money, we can see the losses on the graph. It's the difference between the average cost and the price times the quantity that the firm is choosing to produce. So in this case, we don't have profits, we have losses and of course, our firm is a sad firm. Now, you might wonder why the firm chooses to produce if it's actually losing money and this goes back to our costs. Remember the firm has fixed costs and variable costs. As long as the firm can cover the variable costs of production, it makes sense to produce, even if you're losing money. Why? Suppose the firm decided not to produce, in that case, it would still have to pay the fixed costs of production. In other words, when the firm doesn't produce, the loses are not zero. The loses might be even bigger than they are in this case, so the firm makes a two step decision process. The first step is to think about where they're not.