3.3.4 Normal profits, supernormal profits and losses

• Normal profit:


  When TR=TC and TC includes the opportunity cost of production.
• Supernormal profit:


  When TR>TC and TC includes the opportunity cost of production.
• Loss:


  When TR<TC and TC includes the opportunity cost of production.
• Why is profit maximising Q where MC=MR?

  At lower quantities, MR>MC. This means additional production adds to more revenue than to costs so profit ↑ and output ↑.

  At higher quantities, MR<MC. This means additional production adds less to revenue than to costs so profit ↓ as output ↑.
• What is the short run shut down point?

  AR(P) = AVC

  If the price is lower than AVC the firm will shut down in the SR.

  If the price > AVC then the firm will continue to produce in the SR (even if they're making a loss) as the price is sufficiently high to cover the VC and go towards paying FC. Therefore, the firm will have a smaller loss if they continue to produce.
• What is the long run shut down point?

  AR(P) = AC.

  If price < AC the firm will be making a loss and so will shut down in the long run.