Normal and supernormal profit, losses and shutdown points

Normal and supernormal profit

• Normal profit: the minimum profit needed to keep the firm's resources in their current use; it is the opportunity cost of the entrepreneur and capital, and is included in average cost. When AR = AC, the firm earns normal profit.
• Supernormal (abnormal) profit: profit above normal profit, when AR > AC.
• Loss: when AR < AC.

Supernormal profit per unit = AR - AC; total supernormal profit = (AR - AC) x Q. On a diagram it is the rectangle between price and AC at the chosen output.

Short-run shutdown point

In the short run fixed costs must be paid whether or not the firm produces. So a firm should keep producing as long as price covers average variable cost (P ≥ AVC): each unit then makes a contribution to fixed costs and reduces the loss. If P < AVC, it should shut down at once, losing only its fixed costs.

The short-run shutdown point is the minimum of AVC.

Long-run shutdown point

In the long run all costs are variable, so the firm must cover average total cost (P ≥ ATC, including normal profit). If P < ATC in the long run, the firm leaves the industry.

Evaluation: why firms survive losses

Firms may stay in business below these points because they expect to cut costs or raise revenue later, they are a start-up building a customer base, they are pricing predatorily to drive rivals out, losses are cross-subsidised from profitable products, they have large cash reserves, they receive state support, or they are public sector firms without a profit motive. The January 2021 WEC13 mark scheme credited points like these as evaluation in an essay on shutdown points.

Worked example

Price is $8, AVC is $6 and ATC is $10 at an output of 1000 units. Should the firm produce in the short run? Compare its losses.

1. Loss if it produces = (ATC - P) x Q = (10 - 8) x 1000 = $2000.
2. Fixed cost = (ATC - AVC) x Q = (10 - 6) x 1000 = $4000; this is the loss if it shuts down.
3. P > AVC, so producing gives the smaller loss.

Answer: Keep producing in the short run: loss $2000 rather than $4000; leave in the long run if price stays below ATC.

Check yourself

1. A firm sells 2,000 units at $25 with average cost $21. Find supernormal profit.
   Show answer

   $8000. (AR - AC) x Q = (25 - 21) x 2,000 = $8,000.

2. A firm sells 500 units at $40 with average total cost $46. Find its loss.
   Show answer

   $3000. (ATC - P) x Q = 6 x 500 = $3,000.

3. At 500 units, ATC is $46 and AVC is $34. Find total fixed cost.
   Show answer

   $6000. AFC = 46 - 34 = $12, so TFC = 12 x 500 = $6,000.

4. Price is $30, AVC is $33 and ATC is $40. In the short run the firm should
   • shut down immediately
   • keep producing
   • raise output
   • earn normal profit
   Show answer

   shut down immediately. P < AVC, so every unit produced adds to the loss; shutting down limits the loss to fixed costs.

5. A firm earning normal profit has
   • average revenue greater than average cost
   • zero revenue
   • average revenue equal to average cost
   • marginal revenue greater than marginal cost
   Show answer

   average revenue equal to average cost. Normal profit is included in AC, so AR = AC.

6. In the long run a firm will leave the industry if price stays below
   • average total cost
   • average variable cost
   • marginal revenue
   • average fixed cost
   Show answer

   average total cost. All costs are variable in the long run, so all must be covered.

7. The short-run shutdown point is at the minimum of which curve?
   • Average total cost
   • Marginal revenue
   • Average variable cost
   • Average fixed cost
   Show answer

   Average variable cost. Below minimum AVC the firm cannot cover variable costs.

Practise with instant feedback Print this lesson

Sources

• Pearson Edexcel International Advanced Subsidiary/Advanced Level in Economics specification (XEC11/YEC11), Unit 3 Business behaviour and Appendices 6 and 7
• Pearson Edexcel IAL Economics WEC13/01 mark scheme, January 2021

Last updated 8 November 2026. Spotted a mistake? Tell us.