The Goal Of Profit
The aim of any business is to make profit.
Normal Profit this is when the firm is earning just enough profit to keep the Entrepreneur in that line of business. Normal profit is included in the cost curves. Includes opportunity cost.

Normal profit occurs at the Breakeven point. this is where MC is equal to AC, so the firm is covering ALL ECONOMIC costs.

The shut-down point occurs where the firm is covering only part of its variable costs, and none of its fixed costs. If a firm is unable to cover its fixed costs then there is no point in trading it will temporarily cease production.

This point occurs where MC is equal to AVC.

REVENUE

Revenue is the amount the seller receives from selling their output.

Total revenue (TR) This is calculated by multiplying the number of units sold (Q) by their price (P).

Average Revenue (AR) is the price per unit sold or Total revenue divided by the number sold.

AR = TR/Q          

Average revenue always equals price.
AR = P

REVENUE AND PERFECT COMPETITION
A perfect competitor is a  PRICE TAKER, who must take the price which is ruling in the market, but they can sell all they want at this price.

The Perfect Competitors demand curve (AR) is horizontal and therefore perfectly elastic.
Because firms face a perfectly elastic demand curve MR (marginal revenue) will equal price.

They can sell all they want at the market price but will be unable to have any influence over the price.

PROFIT MAXIMISING LEVEL OF OUTPUT

Marginal Revenue = Marginal Cost      

Which is at point Q* on the diagram. For any output less than Q*, such as Q1, marginal revenue is greater than marginal cost. The firm will make more profits as long as the extra revenue brought in from selling the last unit of output (MR) is greater than the extra cost that is incurred in producing it (MC).
- Producing an extra unit of output beyond Q* (such as Q2) will result in that unit of output addingmore to total cost than it adds to total revenue MR<MC.
- Profit will be maximised where MC = MR – where the cost of one additional unit of output is equal to the revenue contributed by that unit.

THE LONG - RUN SITUATION FOR A PERFECT COMPETITOR IS ALWAYS NORMAL PROFIT.

BECAUSE THERE ARE NO BARRIERS TO ENTRY OR EXIT, FIRMS CAN EASILY ENTER OF EXIT THE MARKET. THIS MEANS THAT A NORMAL PROFIT WILL ALWAYS BE MADE IN THE LONG-RUN.

Perfect Competition and

SUPER NORMAL PROFIT

This occurs where MR = MC is ABOVE the AC curve and so the firm is making a profit which more than covers all of their economic costs.

A firm may be able to make super profit in the short-run, but not for very long. If the price ruling in the market is above the firm’s Average Cost curve, super profit will be made, because there is already an allowance for normal profit in the AC curve.

In the long run a firm in perfect competition cannot make a super normal profit as the super normal profit continues other firms will enter the market and bring the price down reducing the profit level of all the firms.

If a super normal profit is being made, more firms will enter the market, increasing market supply to S2. This will decrease the price to P2.
Since the firm is a price taker MR will shift diownwards to MR2 and so the profit maximising output will now be at Q2, and a normal profit is being made.

SUB-NORMAL PROFIT

This occurs where MC = MR is below the AC curve, but above the AVC (shutdown point).

The firm is making a profit, but not enough to cover ALL economic costs, including opportunity costs and so it is making a sub normal profit.

In the long run, even if the firm is producing above the shut-down point, if firms are not making enough profit some of them will leave the market until the price increases enough so that the remaining firms make a normal profit.

If a sub normal profit is being made, firms will exit the market, decreasing market supply to S2. This will increase the price to P2.
Since the firm is a price taker MR will shift upwards to MR2 and so the profit maximising output will now be at Q2, and a normal profit is being made.

NORMAL PROFIT.

A perfectly competitive firm will always make a normal profit in the long-run. The market equilibrium price will be at a point where all firms in the market will make a normal profit.

A normal profit is where MC = MR = AC - all economic costs are being covered, including opportunity cost.