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Short run equilibrium - Perfect competition:
In the short-run, the perfectly competitive firm maximizes its profit by producing output where MC=MR=P. This is shown in the diagram below (labeled Figure I) as output Q1. The firm’s total profit is represented by the shaded rectangle P, ABC which is obtained as total revenue (rectangle P,OQ,C) less total cost (rectangle A,OQ,B). It follows that, in the short-run, the firm in perfect competition is making positive economic profit, otherwise referred to as abnormal profit or supernormal profit.
In the above diagram, the short-run marginal cost, average total cost, average variable cost curves are labelled SMC, SAC, and SAVC respectively.
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