<p>There is no loss at Q' and you are indeed right that the yellow area represents the firm profits. However, if you were to compare the yellow area to the blue area you would find that the latter is greater. So profit for the firm is not optimal at Q' but is optimal at Q*. This is what the quote refers to, it says the firm will be generating losses on its marginal production (so on the quantity Q' - Q*). It does not say that the firm will generate losses on production in general. This will only happen beyond MR=ATC or TC=TR</p>

CC BY-SA 4.0
2018-11-07T15:27:40.750Z
2018-11-07T15:27:40.750Z
Henk from Holland 
<p>In perfect competition, <span class="math-container">$MR=P$</span>. </p>

<p>When <span class="math-container">$MC&gt;P$</span>, marginally you're generating losses but you may still be profitable overall. This is represented by your (positive) yellow area, which is smaller than the blue area (the optimal one).</p>

CC BY-SA 4.0
2018-11-07T15:27:47.340Z
2018-11-07T15:27:47.340Z
Yann
<p>Here's a graph for reference:
<a href="https://i.sstatic.net/Qnomd.png" rel="nofollow noreferrer"><img src="https://i.sstatic.net/Qnomd.png" alt="enter image description here"></a></p>

<p>In the left graph, I read from a book (CFA L1 notes) that</p>

<blockquote>
  <p>At any output above the quantity where <span class="math-container">$MR = MC$</span>, the firm will be generating losses on its marginal production and will maximize profits by reducing output to where <span class="math-container">$MR = MC$</span>."</p>
</blockquote>

<p>But now consider this:</p>

<p><a href="https://i.sstatic.net/x8XjA.png" rel="nofollow noreferrer"><img src="https://i.sstatic.net/x8XjA.png" alt="enter image description here"></a></p>

<p><span class="math-container">$Q'$</span> is an output level above the one at which <span class="math-container">$MC=MR$</span>. Shouldn't the yellow region represent a positive economic profit in this case? I can understand that at any output level above the one at which <span class="math-container">$ATC=MR$</span>, the firm would start making losses. But isn't the quote above incorrect, or am I missing something? Sure, you might be making a suboptimal profit at output <span class="math-container">$= Q’$</span>, but you’re certainly not making an outright loss.</p>

<microeconomics><cost><competition><profits>
In perfect competition, why is there economic loss if marginal cost > marginal revenue?
Shirish
# In perfect competition, why is there economic loss if marginal cost > marginal revenue?

(Asked by: username_0 on 2018-11-07)

Here's a graph for reference:
[![enter image description here](https://i.sstatic.net/Qnomd.png)](https://i.sstatic.net/Qnomd.png)

In the left graph, I read from a book (CFA L1 notes) that

> At any output above the quantity where $MR = MC$, the firm will be generating losses on its marginal production and will maximize profits by reducing output to where $MR = MC$."

But now consider this:

[![enter image description here](https://i.sstatic.net/x8XjA.png)](https://i.sstatic.net/x8XjA.png)

$Q'$ is an output level above the one at which $MC=MR$. Shouldn't the yellow region represent a positive economic profit in this case? I can understand that at any output level above the one at which $ATC=MR$, the firm would start making losses. But isn't the quote above incorrect, or am I missing something? Sure, you might be making a suboptimal profit at output $= Q’$, but you’re certainly not making an outright loss.

**Tags:** microeconomics, cost, competition, profits


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## 2 answers

### Answer by username_1 on 2018-11-07. Score: 2 | Accepted answer

There is no loss at Q' and you are indeed right that the yellow area represents the firm profits. However, if you were to compare the yellow area to the blue area you would find that the latter is greater. So profit for the firm is not optimal at Q' but is optimal at Q\*. This is what the quote refers to, it says the firm will be generating losses on its marginal production (so on the quantity Q' - Q\*). It does not say that the firm will generate losses on production in general. This will only happen beyond MR=ATC or TC=TR


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### Answer by username_2 on 2018-11-07. Score: 2

In perfect competition, $MR=P$.

When $MC>P$, marginally you're generating losses but you may still be profitable overall. This is represented by your (positive) yellow area, which is smaller than the blue area (the optimal one).


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