Supernormal Profit I Perf Comp l Lec 13 l English l B.A / B.com / A Levels I Jagdeep Ma'am

Summary

Jagdeep explains how a firm in a perfectly competitive market can earn supernormal (abnormal) profit in the short run.

• Perfectly competitive firms are price takers. They accept the market price, so average revenue (AR) and marginal revenue (MR) are horizontal and equal to the price: AR = MR = P.
• Profit is maximized where MC = MR, provided the marginal cost curve crosses the marginal revenue curve from below.
• Supernormal profit occurs when total revenue exceeds total cost:
  • Supernormal profit = TR − TC
  • Normal profit occurs when TR = TC.

The video uses a diagram with price and costs on the vertical axis and output on the horizontal axis. At the profit-maximizing output, Q, the price line shows revenue per unit and the average-cost curve shows cost per unit.

• Total revenue = price × output (P × Q)
• Total cost = average cost × output (AC × Q)

The difference between total revenue and total cost is the firm’s supernormal profit. In the diagram, it is shown as the rectangle between the price line and the average-cost curve, extending across output Q.

A quicker way to identify profit at the profit-maximizing output is to compare the average-cost curve with the price/MR line:

• AC below price/MR: supernormal profit
• AC equal to price/MR: normal profit
• AC above price/MR: a loss

The lesson focuses on supernormal profit. Losses in perfect competition are noted as the subject of a later video.

Speaker

• Jagdeep — instructor and presenter