3.3.4 Normal profits, supernormal profits and losses

Question 1

Normal profit?

Answer 1

• TC = TR (breaking even)
• The minimum reward necessary to keep factors of production in their present use

Question 2

Supernormal profit?

Answer 2

• If revenue > costs (private and opportunity)

Question 3

Profit =

Answer 3

Revenue - costs (private and opportunity)

Question 4

Profit maximisation on graph?

Answer 4

• Where TR is as far above TC as poss
• or MR = MC

Question 5

Shutdown points?

Answer 5

• When the firm is not covering average variable costs

Question 6

On the graph, when will a firm shutdown and when will it continue to operate?

Answer 6

• Operates when MC above AVC
• SR: Shuts down if it cannot cover AVC (price below AVC)
• LR: Shuts down if it cannot cover AC (price below AC)