Having just completed Perfect Competition with my A2 class I used a couple of packets of M&M’s to drum home the concept of marginal analysis MC=MR. It has always been something that students have struggled with but I am hoping this experience of creating graphs with M&M’s might help their understanding and when to use the concept.
Profit is maximised at the rate of output where the positive difference between total revenues and total costs is the greatest. Using marginal analysis, the perfectly competitive firm will produce at a rate of output where marginal revenue equals marginal cost. Marginal revenue, however, is equal to price. Therefore, the perfectly competitive firm produces at an output rate where marginal cost equals the price of output. Remember that the firm will make profits as long as the extra revenue brought in from selling the last unit of output(MR) is greater than the extra cost which is incurred in producing it(MC). Below are some of the graphs they created – perfect competition normal profit, subnormal profit, supernormal profit and the firm and the market for long-run perfect competition.