3.3.4 Normal profits, supernormal profits and losses

Profit maximisation shown through TC & TR curves

Profit maximisation shown through AC & AR curves

Profit maximisation shown through MC & MR curves

Condition for profit maximisation

• Profit is maximised when

  • Gap between TR & TC is at its greatest

  • Gap between AR & AC is at its greatest

  • MC = MR

Normal profit, supernormal profit & losses (the different types of profits can be shown through AC & AR curves)

Normal profit (no gain nor loss)

• TR = TC

• AR = AC

Supernormal profit (more gain than loss - actually have profit)

• TR more than TC

• AR more than AC

Sub-normal profit (profit loss)

• TR less than TC

• AR less than AC

Short-run & long-run shut=down points: diagrammatic analysis

Order of drawing:

1) Draw AR = D

2) MR

3) AC

4) MC

Order of labelling:

1) MC = MR

2) Draw down to x-axis for output - label as Q prof max.

3) Draw up to AC - label y-axis as cost per unit

4) Draw up to AR - label y-axis as price