3.3.4- Normal profits, supernormal profits and losses

condition for profit maximisation

profit is maximised when tr is furthest from tc, with tr above tc

profit maximisation level of output occurs at mc=mr

normal profit

profit level that is sufficient to keep factors of production committed to the business

at ponit where ac=ar

supernormal profit

if ar exceeds ac at the profit maximising level of output

loss

when ac exceeds ar at the profit maximising level of output

short run and long run shut down points with diagrammatic analysis

in short run if firm is making a loss if its ar curve still exceeds avc curve then it is able to stay in the market as the firm has already payed its fixed costs

however if avc exceeds ar firms should leave industry immediately

in the long run firms have to make at least normal profit for factors of production to remain in the market