Short run equilibrium

Under short run, when a firm is in equilibrium position, the firm may earn super normal profits, normal profits or incur losses. To determine this, we introduce an AC curve. The below diagram illustrates the concept.

Normal profits 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 To earn super normal profits, AR > ATC. In the diagram, MC cuts MR at E to give the equilibrium output OQ which can be sold at equilibrium price OP. At OQ, the cost per unit is BQ. Therefore, in equilibrium position, by fixing its price as OP and output as OQ, the firm makes supernormal profit per unit equal to AB or total profit equal to PABC.

Losses

Nothing guarantees that a monopolist will earn profit. It all depends upon his demand and cost conditions. If the monopolist faces a very low demand for his product and his cost conditions are such that AC>AR, he will not be making profit, but incurring a loss. In the diagram, MC cuts MR at E, the point of loss minimization. At E, the equilibrium output is OQ and the equilibrium price is OP. The cost corresponding to OQ is QA. QA is greater than revenue per unit i.e., BQ. Thus, the monopolist incurs losses to the extent of AB per unit or the total loss is PCAB, the shaded area in the diagram.  