We learnt in the previous lesson that to maximize profit; firms always try to produce at MR = MC. We will now see the relation of MR = MC with respect to other per units costs and how it affects decision making.

Let’s break it down step-by-step with clarity:

🔸 Case 1: MR (or P) cuts MC above or at ATC

• This means the firm is earning more than its total cost per unit.

• The firm is making economic profit.

✅ Result:

Highly profitable — the firm should definitely continue production.

🔹 Case 2: MR = MC at the Minimum Point of ATC

✅ What It Means:

• The price (P = MR) is exactly equal to average total cost at the output level where MC = MR.

• This is the break-even point.

📈 Visual Insight:

• ATC is at its minimum (most efficient scale).

• The firm is not making any economic profit, but also not incurring a loss.

✅ Result:

The firm earns zero economic profit (also called normal profit) and should continue operating.

🧠 Why?

• All costs (both fixed and variable) are fully covered.

• The firm is earning just enough to pay for its opportunity costs (implicit costs).

• There is no incentive to exit or enter the market.

🔸 **Case 3: MR = MC at or above AVC, but below ATC

• The firm cannot cover total cost (ATC), but it can cover variable cost (AVC).

• It is making a loss, but not enough to justify shutting down.

• This is called operating at a loss or minimizing losses.

✅ Result:

The firm should continue operating in the short run.

🧠 Why?

• It is still covering variable costs and contributing something toward fixed costs.

• Shutting down would mean a larger loss equal to the entire fixed cost (TFC).

📉 What happens over time?

• If losses persist, some firms will exit the market.

• Supply falls, which can raise the market price.

• Eventually, MR (Price) may rise and shift to cut MC at ATC, restoring normal profit.

🔹 Case 4: MR = MC at the Minimum Point of AVC

✅ What It Means:

• The price (P = MR) is just enough to cover average variable cost, and MC = MR occurs right at that point.

• The firm is not covering any of its fixed costs — only its variable costs.

✅ Result:

This is the shutdown point. The firm is indifferent between producing and shutting down.

🧠 Why?

• If the firm produces, it exactly covers its variable costs, but not fixed costs — so the loss equals TFC.

• If it shuts down, it also loses the entire TFC — no gain or extra loss either way.

🔸 **Case 5: MR (or P) cuts MC at or below AVC

• The firm cannot even cover variable costs.

• Every unit produced increases total losses.

❌ Result:

The firm should shut down immediately, even in the short run.

✅ Conclusion

• Condition A: MR = MC above ATC → Highly Profitable .

• Condition B: MR = MC at ATC minimum → Breakeven, neither profit, neither loss.

• Condition C: MR = MC between AVC minimum and ATC minimum → Operate at a loss (short-run continuation).

• Condition D: MR = MC at AVC minimum → Shutdown.

• Condition E: MR = MC below AVC → Immediate Shutdown .