Economics - 3.3.4 - Normal profits, supernormal profits and losses - A Level

Shut-down points

- If firms maintain losses, they may have to shut down, as they are no longer competitive in the market or putting their resources to good use, and would be better suited in another market. - Neo-classical economics predicts that firms will continue operating in the short-run as long as they can cover their variable costs. - If, for instance, a firm is making a loss of £10 million, but the alternative next best situation is making a loss of £20 million, the firm will continue operating, as it is profit maximising. - A firm will only shut down once the operating losses are greater than if a firm were shut down.

Condition for profit maximisation and reason

MR = MC. This is because this is before the turning point when additional units start to cost the firm more than they gain. This is also the point when the distance between TC and TR is greatest (as TC curves).

Normal profits

Normal profit is an economic cost. This is the minimum profit that a firm must make if it is to remain competitive in the market.

Condition for normal profits

TR = TC

Condition for supernormal profits

TR > TC

Break-even point

The levels of output where total revenue equals total cost, at the boundary between profit and loss.

Supernormal (abnormal) profits

The profit over and above normal profit

Profit maximisation

The standard aim of firms in neo-classical economics