3.3.4 Normal profits, supernormal profits and losses

• What is the profit maximising point?

  MC = MR
• What is profit?

  Revenue - costs
• When should a firm leave the market?

  when total costs are above demand
• What are the types of profit?

  • Normal
  • Supernormal
• What is normal profit?

  • The minimum level of profit to keep a firm in the market
  • Price must at least equal the Average Costs (P = AC)
• What is supernormal profit?

  • Profits that exceed normal profit
  • Price > AC
  • In the long run (with no barriers to entry), this type of profit will attract new firms causing supply to shift right and prices to fall. 
  • This will happen until normal profit is reached again
• What does profit indicate?

  • Creation of business incentives
  • Creation of worker incentives
  • Creation of shareholder incentives
  • Reward of risk taking and innovation
  • Source of finance
  • Signal of success
• What's the revenue maximising point?

  MR=0
• What's the sales maximising point?

  AR = AC