Question

What is another way i can understand the the average cost curve? in the book it talks about how its profits or losses but i don't fully understand what causes them and how to interpret them on the graph. Reply to Thread Filter by: All Posts | There are no replies in this thread Reply to Thread

Answer 1

Answer — The firm ( be it monopoly or any market) gets equilibrium when its MR=MC. But at equilibrium whether a firm will get profits, abnormal profits or losses depends upon the price and average cost.

• If P=AC , then the firm will get a normal profit ( zero economic profit) . It means the firm is only able cover its costs ( both variable and fixed costs)
• If P >AC ,then the firm earns a supernormal profit, because she is able to sell her product at a higher price than the costs. This extra profit may be obtained by TR —TC .
• If P<AC ,then the firm get losses as she is not able to recover his costs. But despite shut down the firm continues to produce because, she has already spent over fixed costs. So the firm shut down the production, it will get losses of fixed 3.The firm will continue to produce till the price is above the average variable cost.
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  PEAC PAC Normal profit PLAG rm earns Losses en's Cronor profibre » prive Price PI/Mkeses///M quantity Quantity quantity