F000sey
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Hi everyone! Wonder if anyone can help clarify to me a bit of confusion I have over my economics work. I understand that when MR>MC, a profit is made and so continue to increase output until MR=MC, and that beyond this point (MC>MR) losses would start being made hence profits are maximised when MR=MC. I'm just confused then as to why on diagrams when looking at (abnormal) profits, profits are shown as the difference between marginal revenue and AVERAGE costs rather than marginal? As in when looking at an upward sloping MC curve and a downward sloping (or constant) MR curve, would the (triangular-ish) area between them not be the profit? For example in perfect competition when MC=MR, abnormal profits = 0 so how can that be the maximum?
Sorry if my question is badly worded I'll happily try to make it clearer and really grateful for any help! Thank you.
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Mike_123
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(Original post by F000sey)
Hi everyone! Wonder if anyone can help clarify to me a bit of confusion I have over my economics work. I understand that when MR>MC, a profit is made and so continue to increase output until MR=MC, and that beyond this point (MC>MR) losses would start being made hence profits are maximised when MR=MC. I'm just confused then as to why on diagrams when looking at (abnormal) profits, profits are shown as the difference between marginal revenue and AVERAGE costs rather than marginal? As in when looking at an upward sloping MC curve and a downward sloping (or constant) MR curve, would the (triangular-ish) area between them not be the profit? For example in perfect competition when MC=MR, abnormal profits = 0 so how can that be the maximum?
Sorry if my question is badly worded I'll happily try to make it clearer and really grateful for any help! Thank you.
Your level of output is when MR=MC. You then draw a vertical line upwards from this output level and look at where this intersects the average revenue (price) line and the average cost line. Your profit (or loss) is the difference between the two multiplied by the MR=MC output you've found.
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16characterlimit
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MC=MR is short run profit maximisation output as you correctly explained because at further outputs you start to make a loss.

The reason supernormal profits are calculated from average costs instead of marginal costs is because a firm cares about all of its costs, not just the marginal (for one extra unit) cost. For all intents and purposes you could have a single unit of output which was free to produce (0 MC), but with an average cost of £100000 you wouldn't be a very profitable business.

Although in perfect competition there are no super normal profits, the entrepreneur is still being rewarded with normal profit. Although 0 supernormal sounds like a bad deal with no incentives for anyone to do it, the whole point of competitive markets is that as soon as there's something better, they'll go and do that instead thanks to no barriers to entry.
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