Profit in the Short Run

Profit is the difference between total revenue (TR) and total cost (TC). It's a crucial concept for businesses to understand their financial performance.

Calculating Profit

Profit = Total Revenue (TR) - Total Cost (TC)

Types of Profit

Economists distinguish between different types of profit based on the level of return to the factors of production.

• Normal Profit: This is the minimum level of profit required to keep a firm in existence. It represents the opportunity cost of the entrepreneur's time and capital. If a firm earns only normal profit, it will not exit the industry, but it will not enter new firms either.
• Sub-normal Profit: This occurs when a firm earns a profit less than normal profit. This means the firm is not earning a sufficient return to justify its continued operation. Over time, firms with sub-normal profits will exit the industry.
• Supernormal Profit: This occurs when a firm earns a profit greater than normal profit. This attracts new firms to the industry, increasing supply and driving down prices. This reduces the supernormal profit until it reaches the level of normal profit.

Illustrative Table

Profit Type	Profit Level	Impact on Industry
Normal Profit	Zero	No entry or exit from the industry
Sub-normal Profit	Negative	Firms exit the industry
Supernormal Profit	Positive	New firms enter the industry

Factors Affecting Profit

Several factors can influence a firm's profitability, including:

• Demand for the product
• Cost of production (e.g., wages, materials, rent)
• Efficiency of production (e.g., technology, management)
• Competition in the market

Short-Run vs. Long-Run Production and Profit

In the short run, some factors of production are fixed (e.g., factory size), while others are variable (e.g., labor). In the long run, all factors of production are variable. The long run allows firms to adjust their scale of operations to maximize profit.

The relationship between cost and output is crucial for determining profit. Understanding the concept of marginal cost (MC) and marginal revenue (MR) is essential.

A firm maximizes profit by producing the quantity where MR = MC.

Profit Maximization

A firm maximizes its profit by producing the quantity of output where the marginal cost (MC) equals the marginal revenue (MR). This is because producing more output as long as MR > MC will increase profit, while producing less output as long as MC > MR will also increase profit. The profit-maximizing quantity is therefore the point where MC = MR.

The profit is then calculated as: Profit = (Total Revenue - Total Cost) at the profit-maximizing quantity.