- Profit-maximising output
- The profit-maximising output is the quantity where marginal revenue equals marginal cost, the last point before an extra unit costs more than it brings in.
- Break-even point
- The break-even point is where the price a firm receives is exactly equal to its average cost of production, so it earns only normal profit.
Outcomes at the profit-maximising output
Can you name the three outcomes a firm can reach at the output where MC equals MR?
Once the firm has chosen its output, comparing price with average total cost at that output says which of the three it has reached.
Supernormal profit on the diagram is where the price, read off the average revenue curve, lies above average total cost at the chosen output.
Can you think of an example?
A bakery sells 1,000 loaves a week at £3, where MC = MR, and its average total cost there is £2.20. It earns (£3 − £2.20) × 1,000 = £800 a week above normal profit.
Normal profit on the diagram is where the price exactly equals average total cost at the chosen output, so the firm just breaks even.
Can you think of an example?
Another bakery sells 800 loaves at £2.50, and its average total cost at that output is also £2.50. Revenue and total cost are both £2,000, and that cost includes the owner's normal profit.
A loss on the diagram is where the price lies below average total cost at the chosen output, so revenue does not cover every cost.
Can you think of an example?
A third bakery sells 600 loaves at £2 with an average total cost of £2.40. It loses (£2.40 − £2) × 600 = £240 a week, the smallest loss it can make while it keeps baking.