Profit Perfect competition

Profit defined Subnormal profit Normal profit Supernormal profit Total Profit = TR - TC Profit per unit = AR – ATC Subnormal profit Normal profit Supernormal profit

Profit maximisation (perfect competition) Profit maximisation comes at the point at which the marginal cost (MC) of producing an extra unit equals the marginal revenue (MR) from the sale of that extra unit. It is the point at which MC curve cuts the MR curve. Marginal cost is said to include all costs that allow for normal profit to be made. Normal profit is the amount of profit needed to keep a factor employed in its present activity in the long run.

Supernormal profit (perfect competition) Where MR > MC Points to the left of the intersection of MC and MR At 2 units the MR is £50 and the MC £30. Supernormal profits of £20 have been made. Sales have been sacrificed to achieve supernormal profits.

Profit Maximisation (perfect competition) Where MR = MC At 3 units the MC is equal to MR. That is £50 (MR) and £50 (MC). The amount received from the sale of the extra unit (MR) is equal to the cost of producing that extra unit (MC)

Subnormal profit (perfect competition) Where MR > MC Points to the right of the intersection of MR and MC At 4 units the MR is £50 and MC £80. Subnormal profits of £30 have been made. The extra sales past 3 have come by selling each extra unit for less than the units cost to produce!

Profit levels (perfect competition) Subnormal Profit (MR > MC) Profit maximisation (MR = MC) Supernormal Profit (MR < MC)

Profit levels (imperfect competition) Subnormal Profit (MR > MC) Profit maximisation (MR = MC) Supernormal Profit (MR < MC)