3.3.4 Normal profits, super normal profits and losses

What are normal profits

Normal profits are when a firm is making enough money to cover its cost AR=AC

What are supernormal profits

When a firms AR>AC and this can attract other firms to join the market

How do barriers to entry control whether supernormal profits can be made in the LR

If super normal profits are being made new firms have an incentive to join and will driving up supply up dropping the price prevention supernormal profits from being made. If barriers to entry are high super normal profits can be made in the LR.

What is the shut down point

When a firms cost are greater than its revenues so the business is no longer viable and must shit down

What conditions would a firm reach shut down point in the LR

In the LR a loss making firm will shut down as all factors of production are variable there are no fixed costs so if AC>AR then the firm will shut down

What conditions would a firm reach shut down point in the SR

In the SR a loss making firm may not shut down as if a firm has fixed cost of 20 mil shutting down would mean all of that would be lost but any output cost that covers anything over the VC allows a bit of the 20 mil to be paid of. In the SR even if AC>AR as long as AR>AVC the firm should continue

Show a price taking firm that should continue to operate in the SR

Show a price taking firm that should leave the industry immediately

Show a price setting firm that should continue to operate in the SR

Show a price setting firm that should leave the industry immediately