Explore AR, MR, AC and MC curves. Compare profit maximisation, revenue maximisation and sales maximisation. Built for Edexcel and AQA A Level Economics.
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Steeper = more inelastic demand
At profit-maximisation output Q* = 31.1, the firm charges P* = £68.9 and is earning supernormal profit of £1005 (AR > AC by £32.3 per unit). MC = MR at this point, so no further output change increases profit.
Firms in imperfect competition face a downward-sloping demand curve, so to sell more they must lower their price. This tool draws the average revenue, marginal revenue, marginal cost and average cost curves for a firm with price-setting power, and lets you compare profit maximisation with two alternative objectives: revenue maximisation and sales maximisation.
Draw AR and MR from the same point on the price axis with MR twice as steep, then add a U-shaped AC curve and an MC curve that cuts AC at its lowest point. Mark the output where MC = MR, go up to AR for the price, mark AC at that output and shade the profit rectangle. To compare with perfect competition, mark where MC meets AR (the allocatively efficient output) and shade the deadweight loss triangle between the two outputs. Build the chain: barriers to entry give the firm market power, so it restricts output to raise price, which reduces consumer surplus and creates a welfare loss.
Evaluate: Higher prices and lower output are not the whole story. Supernormal profit can fund research and development, giving dynamic efficiency, and a large firm may benefit from economies of scale that bring its average costs below those of smaller competitive firms. The threat of new entry in a contestable market can also limit how far a firm raises its price. Whether market power harms consumers depends on the height of barriers to entry, the firm’s objectives and whether cost savings are passed on.
Revise the theory behind this tool in our Edexcel revision notes:
Practise drawing the static versions you will need in the exam:
To sell an extra unit the firm must lower its price, and it lowers the price on all the units it sells, not just the extra one. The revenue from the additional unit is therefore partly offset by the lower price on the others, so marginal revenue is less than price. With a straight-line demand curve, MR falls twice as steeply as AR.
Find the output where MC equals MR. Go vertically up from that output to the AR curve to find the price, then read across to the price axis. Find average cost at the same output on the AC curve. Supernormal profit is the rectangle between price and average cost, with a width equal to the profit-maximising output.
When ownership and control are separated, managers may pursue their own objectives, such as higher sales revenue or market share, rather than profit for shareholders. A firm may maximise revenue where MR equals zero, or maximise sales subject to making normal profit, where AR equals AC. Firms may also hold prices down to deter entry or avoid regulation.