A firm earns total revenue: TR = price × quantity. Two more measures matter.
Our example (made-up numbers)
| Quantity | Price = AR | Total revenue | Marginal revenue |
|---|---|---|---|
| 1 | €10 | €10 | €10 |
| 2 | €9 | €18 | €8 |
| 3 | €8 | €24 | €6 |
| 4 | €7 | €28 | €4 |
The points to remember
- AR = TR ÷ Q = the price: the AR curve is the demand curve.
- MR = the change in TR. To sell more, a price maker cuts the price on every unit, so MR falls below AR.
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Economists count normal profit as a cost, so "profit" means profit above it.
Three outcomes
Abnormal profit
Revenue is more than all costs, normal profit included.
Normal profit
Revenue just covers all costs: the firm stays, but no one new rushes in.
Loss
Revenue is less than costs: the firm will leave in the long run.
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Where is profit largest? Make one more unit while it adds more to revenue than to cost (MR > MC).
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Remember it as: MR = MC for the output; AR for the price; AC for the cost; the box is the profit.
Quick reminder
- Axes: Costs, revenue up the side, Q along the bottom
- MC = MR: D = AR, MR, MC and AC; Q1 where MC = MR, P1 above it on AR, the profit box
- Or TR and TC: Q1 where the gap between TR and TC is largest
- Dots with dashed lines to the axes
- No numbers, no title
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The same output shows on a TR and TC diagram: profit is the gap between the two curves.
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Paper 3 reads a firm's diagram almost every year: May 2023 asked for the profit at the profit-maximising output, and November 2024 for the profit-maximising quantity.
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Using the diagram, identify the profit-maximising output and calculate the abnormal profit the firm earns there.
Model answer plan
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How a 2-mark profit calculation is marked
| You write | Marks |
|---|---|
| Valid working: (price − average cost) × quantity | 1 |
| The answer with units | 1 |
| The answer only, no working | 1 |