Economics, 3rd Edition

abnormal profit

 the profit over and above normal profit

normal profit

 the minimum amount required to keep factors of production in their current use

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156  PART 2  SUPPLY AND DEMAND: HOW MARKETS WORK

Where do these marginal adjustments to level of production end? Regardless of whether the firm 

begins with production at a low level (such as Q

1

) or at a high level (such as Q

2

), there is an incentive for 

the firm to adjust its output decisions until the quantity produced reaches Q

MAX

. At any other output level, 

there is an incentive for the firm to either increase or cut back output and increase profit. This analysis 

shows a general rule for profit maximization: at the profit-maximizing level of output, marginal revenue and 

marginal cost are exactly equal.

We can now see how the supply curve is derived. Because a competitive firm is a price taker, its mar-

ginal revenue equals the market price. For any given price, the competitive firm’s profit-maximizing quant-

ity of output is found by looking at the intersection of the price with the marginal cost curve. In Figure 6.7, 

that quantity of output is Q

MAX

.