Hello everybody I am reading micro econ analysis, perfect competition part and get some confuses of terminologies “normal profit” and “economic profit”. It says “economic profit equals total revenues less the opportunity cost of production, which includes the cost of a normal return to all factors of production, including invested capital” is very clear to understand. However, in the context of distinguishing between the firm’s and the industry’s short-run curve it follows some explain as following: * Price takers will produce where P=MC=MR=ATC (in the short term) to maximize profit * Firm will continue operating at the price P1
A firm is said to be making a normal profit when total revenues equal total costs. An economic profit arises when its revenue exceeds the total (opportunity) cost of its inputs. 1) I am assuming that you are asking if firm will exit if it is operating below optimal capacity. At this stage in most cases a firm would have MR>MC, so there is incentive for the firm to produce more and earn more profit. Firm would stay in business. 2) At MR=MC=P=ATC, firm earns zero economic profit i.e. firm is earning normal profits. 3) There is a difference between optimal level of output and full capacity or maximum output a firm can produce. At optimal level of output, firm will maximize profits and in some cases at maximum level of output, the firm can make losses. Example: GM has plant that can produce 10,000 cars in a month, for a particular month the demand for the cars is 6,000. Then optimal level of output will be 6000 and maximum level of output will be 10,000. At the maximum level of output, supply is more then demand, so the firm will make losses. 4) Pure competition = perfect competition