3.3.4 - normal profits, supernormal profits and losses

Question 1

Condition for profit maximisation

Answer 1

profit is maximised when TR and Tc are furthest apart

also occurs at mc=mr because marginal means extra amount gained or lost for one extra unit, marginal profit is the extra profit received for one more unit produced, mp=mr-mc, at quantities before mc=mr mr is still greater than marginal cost which means there is still marginal profit to be made but after mc=mr, mc is greater than mr so a marginal loss is made

Question 2

Normal profit, supernormal profit and losses

Answer 2

normal profit is the return that is sufficient to keep the factors of production committed to the business, this is where ar=ac or tr=tc

Question 3

Short-run and long-run shut-down points: diagrammatic analysis

Answer 3

if a business is operating in a loss it will have to either shut down and leave the market or continue operating in the market.

this is dependent on the firms average variable cost, which are costs that change with output per unit

if average revenue>average variable costs then the firm should continue in the market as each good they produce will generate more revenue than it cost them to make it, so this will help reduce the size of the loss by being able to cover some of their fixed costs

BUT

if average revenue<average variable costs then the firm should leave the market as they will generate less revenue than what it cost to make

in the long run the firm needs to make at least normal profit to remain in the industry

BUT

in the short run they should produce as long as their revenue covers their variable costs, hence the shorten shutdown point is where AVC=AR