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A-Level Economics · Perfect competition (short-run profit) diagram question
Which area is the firm's SUPERNORMAL PROFIT?
The diagram
The answer
The area A B C E. (£7 − £5) × 7 units — rectangle ABCE. Draw the bottom at AC where the firm actually produces, not at the lowest point of AC. Profit = price minus AVERAGE COST AT THE CHOSEN OUTPUT, times quantity: rectangle ABCE. The trap is dropping the box to minAC (the ABNG answer). Draw AC steep enough that the bottom of the box is obviously different from the minimum of the average cost.
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This is one of 6 questions on the perfect competition (short-run profit) diagram — every corner lettered, every wrong answer diagnosed.
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