Short-run profit in perfect competition market
In the short term, perfect competition market will have three different types of profit
such as supernormal profit, normal profit and subnormal profit.
A. Supernormal Profit
The profit maximization occurs when marginal cost equal marginal revenue at a
price of P (RM20) and quantity at Q (9 units).
The firm earns supernormal profit when average revenue (AR) is greater than
average cost (AC).
Based on above diagram, average revenue is RM20 and average cost is RM15.
So, the firm will get the supernormal profit because total revenue (RM180) is
greater than total cost (RM135).
The shaded area (EABP) is shown the profit (supernormal profit) area.
Known as economic profit; (evidence) calculation
B. Subnormal Profit
The profit maximization occurs when marginal cost equal marginal revenue at a
price of P (RM20) and quantity at Q (9 units).
The firm earns normal profit when average revenue (AR) is equal with average
cost (AC). Price is equal at minimum AC, firm at breakeven profit.
Based on above diagram, average revenue is RM20 and average cost is also
RM20.
So, the firm will get the normal profit because total revenue (RM180) is equal
with total cost (RM180).
Known as economic profit; (evidence) calculation
B. normal Profit
The profit maximization occurs when marginal cost equal marginal revenue at a
price of P (RM20) and quantity at Q (9 units).
The firm earns subnormal profit when average revenue (AR) is less than average
cost (AC).
cost (AC).
Based on above diagram, average revenue is RM20 and average cost is RM25.
So, the firm will get the subnormal profit because total revenue (RM180) is less
than total cost (RM225).
than total cost (RM225).
The shaded area (EPAB) is shown the subnormal profit (losses) area.
Known as economic profit; (evidence) calculation
