Livestock Economics, Marketing and Business Management

Short – Run equilibrium with normal profits

SHORT-RUN EQUILIBRIUM WITH NORMAL PROFIT

• Figure shows that E is the equilibrium point, where MC curve cuts the MR curve from below.
• OQ is the equilibrium level of output and OP is the equilibrium price level.
• AC curve is tangent to the AR curve at the point E, Where the firm incurs normal profit, when P=AR = MR = AC =MC.

Normal profits (Click here to view the graph for "Short-Run Equilibrium with Normal profit")

• Just as land has rent, labour wages, capital rate of interest, the reward for entrepreneur, under perfect competition, is normal profit.
• Thus, normal profits are the remuneration for the entrepreneur, under perfect competition.
• Normal profits are those profits which are not large enough to attract any new entrepreneur into the business nor are they small enough to make the existing entrepreneurs quit the business.