3.3.4 normal profits, supernormal profits and losses

What are profits?

The difference between revenue and costs.

What are the conditions for profit maximisation?

TR and TC are the furthest apart

What are normal profits?

The minimum amount required to ensure that firms will continue to supply its goods or services and keep their factors employed in the present activity in the LR. Will keep firms in the industry.(AR=AC or TC=TR)

What happens when a firm is earning more than normal profits?

Supernormal

What is a loss?

Where the form fails to cover its costs AR<AC TR<TC

What is the shutdown condition?

When firm making a loss not always best decision to shut down straight away- depends on AVC
AVC< AR should keep producing - only shut down when fixed costs increase When a firm cannot cover its AVC- so AVC> AR- should shut down immediately
In long run need to make normal profits to stay in industry

What is the short run shutdown point?

Should produce as long as revenue covers variable costs
So SR shutdown condition is AVC= AR