3.3.4 - normal profits, supernormal profits and losses Flashcards
Where is profit maximised?
Where MR = MC, the point where TR and TC are furthest apart
What is normal profit?
When the firms just cover its costs (the opportunity cost and the profit needed to stay in the market) , and is able to keep FOPs committed to the business.
Where does normal profit occur?
AC = AR or TR = TC
What is supernormal profit?
When profit is greater than the level of normal profit.
Where does supernormal profit occur?
AR>AC or TR>TC
Where does the short-run shut down point occur?
Where AVC = AR. If AR > AVC, each additional unit sold reducing the size of the losses, covering fixed costs - therefore, they continue to operate. If AR < AVC, firms will shut down as each unit sold increases the size of the losses.
Where is the long-run shut down point?
Where ATC = AR. If AR > ATC, each additional unit adds to profits, therefore the firm will continue to operate. When AR < ATC, firms will shut down because each unit sold adds to the losses.
