Explain supernormal equilibrium, Managerial Economics

Q. Explain Supernormal Equilibrium?

Supernormal Equilibrium: E is the point of stable equilibrium as MC = MR and MC cuts the MR from below.  

278_Explain Supernormal Equilibrium.png

Figure: Supernormal Equilibrium

This is point the firm produces OM amount of output. To produce this output, firm incurs an average cost of MF, whereas it earns average revenue of ME. Because at equilibrium ME > MF, firm makes a profit of FE per unit of output sold. Again, because the total revenue earned when OM is sold is OPEM and total cost incurred to produce same output is ORFM, total profit earned at that level of output is RPEF.

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