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The diagram below shows a firm operating under conditions of perfect competition in the short run - Leaving Cert Economics - Question 1 - 2016
Question 1
The diagram below shows a firm operating under conditions of perfect competition in the short run. (a) What is represented by the lines numbered 1 to 3? Use the ans... show full transcript
Worked Solution & Example Answer:The diagram below shows a firm operating under conditions of perfect competition in the short run - Leaving Cert Economics - Question 1 - 2016
Step 1
Step 2
Show clearly on the diagram the total supernormal profit of the firm.
Answer
To indicate the total supernormal profit on the diagram, shade the area between the Average Revenue (AR) curve and the Average Cost (AC) curve above the quantity produced. This shaded area represents the total supernormal profit earned by the firm.
Step 3
Explain the term supernormal profit
Answer
Supernormal profit refers to any profit earned in excess of normal profit (which covers costs). It occurs when a firm's average revenue (AR) is greater than its average cost (AC). This indicates that the firm is making an economic profit above what is necessary to cover the costs of production.