A friend of mine was complaining that her landlord was raising the rent on her business. "How can I stay in business," she said, "When I have to keep charging my customers more?" I explained that a in her business, she was a price taker and didn't have pricing power. In the accompanying graph, I will demonstrate that an increase in fixed costs affect the amount of profit she makes, but not the price or quantity of output.
Before the rent increase, the maroon ATC respresents the average cost of production. The business maximizes profits where MR = MC and makes 7 units. When the rent increases, the fixed costs increase and the yellow ATC curve now represents the average costs of the business. The firm should still produce at 7 units as the profit max point has not changed. The firm is only making a normal profit now, but shouldn't raise its prices. I believe if more business owners understood this concept, they could stay in business and not drive customers away to Wal-Mart when they raise their prices above the competitive ideal.
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