What happens if average revenue is greater than average cost?

When average revenue is greater than average cost, it indicates that the firm is generating more income per unit sold than it is spending to produce each unit. This situation leads to supernormal profit, which is also known as economic profit.

Supernormal profit occurs when total revenue exceeds total costs (including both explicit and implicit costs). In practical terms, if a firm sells its products for a higher price than the average cost of producing those products, it can effectively cover its costs and have a surplus—this surplus is what constitutes supernormal profit. Such a profit can incentivize firms to expand production, enter the market if they are not already in it, or attract new competitors to the industry, as it signals a potentially lucrative opportunity.

This scenario contrasts with other outcomes. For instance, if average revenue were equal to average cost, the firm would be breaking even—achieving normal profit, which is not sufficient to incentivize entry into the market. Conversely, if average revenue were less than average cost, the firm would incur losses, discouraging continued operation unless adjustments are made.

Thus, the situation where average revenue exceeds average cost directly results in supernormal profit, fulfilling the condition of profitability that appeals to both existing firms and potential entrants in the market.