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The ZrO2–MgO phase diagram is experimentally studied using XRD, SEM-EDX, and DTA. The ZrO2-based solutions are modeled as ionic solutions using compound energy formalism. The thermodynamic parameters are optimized using own and literature experimental data. The calculated ZrO2–MgO phase diagram is used to interpret the microstructure and phase transformations observed in the industrial Mg-PSZ material in as-received and heat treated states.