When market demand declines, MR declines below MC, which causes firms to suffer temporary losses, because they must lower their prices below their ATC, causing less efficient producers to exit the market. Other firms will enter the industry, increasing supply from S 1 to S 2, causing lower prices until the economic profits are again reduced to 0. When market demand increases, prices rise, causing the MR to exceed ATC, allowing the firm to earn an economic profit proportional to the increased demand.įor the industry, if the market demand increases from D 1 to D 2, then firms within the industry will be able to make economic profits. For a competitive firm, MR equals the market price. A firm maximizes profit when it's marginal revenue ( MR) equals its marginal cost ( MC) equals the average total cost ( ATC).
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