Topics: Microeconomics | Theory of the Firm | Market Structures
Level: JC H2 Economics / IB Economics HL
Always shading the wrong area for Economic Profits? Drawing firm diagrams can be tricky. If you don’t find the correct MC = MR intersection, your entire profit box will be wrong, which can cost you major points in your A-Level or IB exams. In this quick video, we walk you through exactly how to draw and identify Supernormal Profits step-by-step.
Watch the tutorial above with accompanying notes below:
1. Setting Up the Firm Diagram (0:00 – 0:50)
Before finding profits, you must define the profit-maximization condition: Profits = Total Revenue (TR) – Total Cost (TC).
The Golden Rule: A firm maximizes profit where Marginal Cost (MC) = Marginal Revenue (MR), specifically where the MC curve is rising.
The AR and MR Curves: For imperfect markets (like Monopoly or Monopolistic Competition), the Marginal Revenue (MR) curve is twice as steep as the Average Revenue (AR / Demand) curve.
2. Finding the Profit-Maximizing Quantity and Price (0:50 – 1:30)
Once you draw your Nike-swoosh Marginal Cost (MC) curve and your U-shaped Average Cost (AC) curve, follow these steps:
Step 1 (Find Q): Find the exact point where MC = MR. Draw a dotted line straight down to the X-axis. This is your profit-maximizing Quantity (Q).
Step 2 (Find P): From that exact quantity, draw a dotted line straight up until it hits the Demand (AR) curve. Look to the left (Y-axis) to find your Price (P).
3. Shading the Supernormal Profit Area (1:30 – End)
To find the profit rectangle, you need to compare Average Revenue to Average Cost at your chosen quantity.
Go to your quantity (Q) and draw a line up to the Average Cost (AC) curve. Look left to find the cost per unit.
Since your Price (AR) is higher than your Average Cost (AC), the firm is making Supernormal Profits (positive economic profits).
Shade the rectangle bounded by Price, AC, and Quantity!
Want to ensure you never draw a flawed diagram in the exams again? Join our JC Economics Tuition A-Level or IB Economics Tuition classes where we practice these diagram frameworks until they become second nature. (For more step-by-step diagram rules, check out our Free Notes on Firms & Decisions. For other topics, browse our full Economics Notes Library).