3.3.4 Normal profits, supernormal profits and losses

Question 1

Profit

Answer 1

Profit = TR-TC

Question 2

Condition for profit maximisation

Answer 2

• In the short run a profit maximising firm produces the quantity of output where MR=MC.
• In the long run, under perfect competition, a profit maximising firm produces where P=MR=MC.

Question 3

Normal profit

Answer 3

-The minimum level of required to keep a firm in an industry.
-It is the profit that covers all explicit and implicit costs of production but provides no extra income above those costs.
->TR=TC.

Question 4

Supernormal profit

Answer 4

-The firm is earning more than enough to cover both explicit and implicit costs.
->TR>TC
-This attracts competition, which can drive down prices, reducing economic profit overtime.

Question 5

Losses

Answer 5

-The firm is not covering all of its costs, including both explicit and implicit costs.
->TR<TC
-This leads to firms shutting down in the short run, if they cannot cover its variable costs.