Economics – Profit and Revenue

  • Total Revenue (TR): This is the total income a firm receives.  This will equal price × quantity
  • Average Revenue (AR) = TR / Q
  • Marginal Revenue (MR) = the extra revenue gained from selling an extra unit of a good
  • Profit = Total revenue (TR) – Total Costs (TC) or (AR – AC) × Q

Profit Maximisation


  • In classical economics it is assumed that firms will seek to maximise their profits. This occurs when the difference between TR – TC is the greatest.
  • Profit maximisation will also occur at an output where MR = MC
  • When MR> MC the firms is increasing its profits and Total Profit is increasing.
  • When MR< MC total profit starts to fall
  • Therefore profit is maximised where MR = MC

Definition Normal Profit.

This occurs when TR = TC. This is the break-even point for a firm. It is the minimum profit level to keep the firm in the industry in the long run

Definition Supernormal Profit

This occurs when TR > TC

Whether To Produce at all

  • If AR > ATC The firm is making supernormal profits
    If AR= ATC The firm is making normal profits
  • IF AR< ATC but AR > AVC. it is making an operating profit, and is
    covering its variable costs. However it is making a loss because it can not cover its fixed costs as well.
  • In the short run it is best to keep producing because it has already paid for its fixed costs. It is at least making a contribution to its fixed costs
  • If AR <AVC The firm is likely to shut down in the short run.

Difficulties in Maximizing Profits: In the real world it is more difficult for firms to max profits because they do not have access to costs and MR easily, it is difficult to predict