Profits 2
Economics: Edexcel A A Level, topic 5.3.5
Profit for Price Takers and Price Makers
Price-takers maximise profits at an output where MC=MR.
Price-taker
- This diagram shows a price-taking firm.
- To maximise profit they produce where MC=MR.
- Only normal profits can be made in the long run.
Price-maker
- This diagram shows a price-making firm.
- To maximise profit, again they produce where MC=MR, but supernormal profits can now be made.
Shutting Down Costs
If a firm isn’t making profit it will consider shutting down.
The long run
- In the long-run a firm will stop producing and shut down if it can’t make normal profit.
- A firm can’t make normal profit if the market price is below the minimum average total cost.
The short run
- In the short run the firm is unable to get out of contracts or sell its assets so will continue producing with prices below the minimum average total cost as long as the price covers the average variable cost of production so it can start to pay off some of its fixed costs.
The need to cover variable costs
- If the situation persists then the firm will look to sell off its assets and get out of contracts (e.g. rent agreements)
- If in the short run the market price doesn’t cover the variable costs then the firm will cease production immediately as continuing production will only increase its debt.
Test yourself on Profits 2
In the long run, price taking firms can only make what?
At what output does a price-taking firm maximise?
In the long run, a firm will stop producing if it isn't making what type of profit?