Abnormal profits, Losses, normal profits in short run Flashcards
In the short run if the market price/average revenue is greater than AC (AR>AC)
(AR>AC) then a firm under p.c would experience abnormal profits
What would abnormal profits encourage
Such abnormal profits would encourage new firms to enter the industry, however this can only happen in the long run
As new firms enter
The supply of goods increases and this causes the market price to fall
When AR<AC
The firm under P.C would incur a loss
When losses re incurred under p.c
Firms are inclined to exit the industry. This can only happen in the long run, which causes supply to decrease and therefore the market price to fall
When the market price is at a level where AR=AC
the firm would earn normal profit
What happens when AR=AC
No new firm would be motivates to enter the industry nor would any existing firm choose to leave, this represents long run eq. under p.c
under pc only normal profits would
be earned due to freedom of exit and entry
What is the productive optimum
where mc=ac which means that production efficiency is maximized under perfect competition
