Producer Behavior and Profit Maximization
Market Failure: Market Power
AO2·AO4·HL
Syllabus requirement
HL students must understand and calculate: TR, TC, AR, AC, MR, MC. Conditions: TR = TC, MC = MR, AR > AC (abnormal profit), AR = AC (normal profit), AR < AC (loss).
Assessment objectives
AO2 Application and AnalysisAO4 Use of Appropriate Skills
Higher LevelThis topic is assessed at HL.
Summary
This topic explains how firms compare revenues and costs to choose output and measure profit. It defines total and average concepts (TR, TC, AR, AC) and marginal concepts (MR, MC), and shows that profit maximisation occurs where MR = MC. Comparing AR and AC at that output determines whether a firm earns abnormal profit, normal profit or makes a loss.
