Lesson 1 of 8 · 12 min
Revenue, economic profit and the MR = MC rule
Every firm maximizes profit by producing where marginal revenue equals a rising marginal cost; what differs across markets is whether marginal revenue equals the price or falls below it.
In short
- A firm in perfect competition is a price taker: it faces a horizontal demand curve, so price = average revenue (AR) = marginal revenue (MR).
- A firm in imperfect competition faces a downward-sloping demand curve: to sell one more unit it must cut the price on all units, so MR < price.
- Profit is maximized where MR = MC and MC is not falling. The price is then read off the demand curve.
- Economic profit = TR − all economic costs, including opportunity costs. Accounting profit = TR − explicit (accounting) costs only.
- Zero economic profit is a normal profit: the firm earns exactly what its capital and other resources could earn in their next best use.
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