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Short term equilibrium

Under short run, when a monopolistic firm is in equilibrium position, it may earn super profits, normal profits or incur losses.

Normal Profit

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When the firm only meets its Average Cost (AC), it earns normal profits and normal profit is also included in Average Total Cost. Normal profit is the normal rate of return on capital and remuneration for the risk bearing factor of an entrepreneur. It is also called as break-even point. The diagram shows that MR=MC at E. The equilibrium output is OQ. Since AR=AC, the firm earns normal profits.

Super Normal Profits

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To earn super normal profits, AR must be greater than AC. In the diagram, the MC curve cuts the MR curve at E to give equilibrium output as OQ and the equilibrium price as OP. At equilibrium, the total revenue (OPUQ) > total cost (OCVQ). Hence, in the short-run, the firm earns total profit of CPUV which is the shaded area in the diagram.

Losses

The firm may also incur losses in the short run.
 
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If AR<AC, then the firm will incur losses. In the diagram, the MC curve cuts MR curve at E to give equilibrium output as OQ and the equilibrium price as OP. At equilibrium, the total revenue (OPUQ) < total cost (OWVQ). Hence, in the short run, the firm incurs a loss indicated by WPUV, the shaded area in the diagram.




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