Contact Us

If you still have questions or prefer to get help directly from an agent, please submit a request.
We’ll get back to you as soon as possible.

Please fill out the contact form below and we will reply as soon as possible.

  • Courses
  • Find a Job
  • Tutoring
  • Home
  • Economics, Finance, & Analytics
  • Economic Analysis & Monetary Policy

Profit Margin and Average Total Cost

How does Average total Cost Relate to Profit Margin?

Written by Jason Gordon

Updated at March 27th, 2023

Contact Us

If you still have questions or prefer to get help directly from an agent, please submit a request.
We’ll get back to you as soon as possible.

Please fill out the contact form below and we will reply as soon as possible.

  • Marketing, Advertising, Sales & PR
    Principles of Marketing Sales Advertising Public Relations SEO, Social Media, Direct Marketing
  • Accounting, Taxation, and Reporting
    Managerial & Financial Accounting & Reporting Business Taxation
  • Professionalism & Career Development
  • Law, Transactions, & Risk Management
    Government, Legal System, Administrative Law, & Constitutional Law Legal Disputes - Civil & Criminal Law Agency Law HR, Employment, Labor, & Discrimination Business Entities, Corporate Governance & Ownership Business Transactions, Antitrust, & Securities Law Real Estate, Personal, & Intellectual Property Commercial Law: Contract, Payments, Security Interests, & Bankruptcy Consumer Protection Insurance & Risk Management Immigration Law Environmental Protection Law Inheritance, Estates, and Trusts
  • Business Management & Operations
    Operations, Project, & Supply Chain Management Strategy, Entrepreneurship, & Innovation Business Ethics & Social Responsibility Global Business, International Law & Relations Business Communications & Negotiation Management, Leadership, & Organizational Behavior
  • Economics, Finance, & Analytics
    Economic Analysis & Monetary Policy Research, Quantitative Analysis, & Decision Science Investments, Trading, and Financial Markets Banking, Lending, and Credit Industry Business Finance, Personal Finance, and Valuation Principles
  • Courses
+ More

How does Average total Cost Relate to Profit Margin?


Does maximizing profit (producing where MR = MC) imply an actual economic profit? The answer depends on the relationship between price and average total cost, which is the average profit or profit margin. If the market price is higher than the firm's average cost of production for that quantity produced, then the profit margin is positive and the firm will earn profits. Conversely, if the market price is lower than the average cost of production, the profit margin is negative and the firm will suffer losses. You might think that, in this situation, the firm may want to shut down immediately. Remember, however, that the firm has already paid for fixed costs, such as equipment, so it may continue to produce for a while and incur a loss. 

Back to:ECONOMIC ANALYSIS & MONETARY POLICY

Related Topics

  • Market Structure
  • Perfect Competition
  • Bidding War
  • Complements & Substitutes
  • Substitution Effect
  • Imperfect Competition
  • Market Power
  • Price Takers
  • Price Makers 
  • Perfect Competition and Decision Making
  • X-Efficiency
  • Captive Market
  • Contestable Market Theory
  • Highest Profit Point in a Perfectly Competitive Market
  • Marginal Revenue
  • Using Marginal Revenue and Marginal Costs to Maximize Profit
  • Marginal Revenue Curve
  • Profit Margin and Average Total Cost
  • Break Even Point - Cost Curve
  • Shutdown Point - Cost Curve
  • Short-Run Decisions Based Upon Costs in a Perfectly Competitive Market
  • Marginal Costs and the Supply Curve for a Perfectively Competitive Firm
  • Long-Run Average Supply (LRAS)
  • Decisions to Enter or Exit a Market in the Long Run
  • Long-Run Equilibrium in a Perfectly Competitive Market
  • Constant, Increasing, and Decreasing Cost Industries
  • Productive and Allocative Efficiency in Perfectly Competitive Markets
  • Market Efficiency
  • Market Inefficiency
  • Pareto Efficiency
  • Market Failure 
  • Search Theory
  • Monopoly
  • Natural Monopoly
  • Legal Monopoly
  • Bilateral Monopoly
  • Promoting Innovation through Intellectual Property
  • Predatory Pricing
  • How Monopolists Set Price with the Demand Curve
  • Total Cost and Total Revenue for a Monopolist
  • Marginal Revenue and Marginal Cost for a Monopolist
  • Inefficiency of Monopoly
  • Perfectly Competitive Market
  • Monopolistic Competition
  • Duopoly
  • Oligopoly
  • Differentiated Products
  • Perceived Demand for a Monopolistic Competitor
  • Monopolistic Competitors Choose Price and Quantity
  • Monopolistic Competitors and Entry
  • Monopolistic Competition and Efficiency
  • Cartel (Economics)
  • Game Theory
  • Traveler's Dilemma
  • Prisoner's Dilemma
  • Iterated Prisoner's Dilemma
  • Nash Equilibrium
  • Diner's Dilemma
  • Trembling Hand Perfect Equilibrium
  • Gambler's Fallacy
  • Arrows Impossibility Theorem
  • Backward Induction
  • Tournament Theory
  • Oligopoly and the Prisoner’s Dilemma
  • Forcing Cooperation in a Prisoner’s Dilemma
  • Cooperation and the Kinked Demand Curve
  • Corporate Merger or Acquisition
  • Antitrust Laws
  • Herfindahl-Hirschman Index
  • Concentration Ratio
  • Other Approaches to Measuring Monopoly Power in an Industry
  • Restrictive Practices under Antitrust Law
  • Natural Monopoly
  • Cost-Plus Regulation
  • Price Cap Regulation
  • Regulatory Capture
atc average total cost profit margin

Was this article helpful?

Yes
No

Related Articles

  • Ricardian Equivalence - Explained
  • Weak Currency (Economics) - Explained
  • Factor Income - Explained
  • Money Multiplier Formula - Explained



©2011-2023. The Business Professor, LLC.
  • Privacy

  • Questions

Definition by Author

0
0
Expand