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                                         Explain profit and loss situation under perfect competition, during the short- run Which economic value is affected if the firm is incurring abormal losses?

Answer:

In the short-run, equilibrium of a firm (under perfect competition) may occur when it is earning super normal profits or normal profits or is incurring super normal losses. These conditions are discussed below: (i) Super Normal Profit Output (units) Diagram Showing Super Normal Profit In the given diagram, the producer is at equilibrium at point 0, where MR = MC, and MC cuts MR from below. At this point, Average Revenue (AR) exceed Average Cost (AC). So, the firm is earning abnormal profits equal to ESQT.                                                    (ii) Super Normal Losses Output (units) Diagram Showing Super Normal Losses In the given diagram, the firm is at equilibrium at point 0. At this point, AC exceeds AR, therefore the firm is incurring abnormal loss equal to NTQP.                                                     (iii) Normal Profit Output (Units) Diagram Showing Normal Profit In the given diagram, the firm is at equilibrium at point 0. At this point AR = AC. So, this depicts the condition of normal profits,                                                               If the firm is incurring abnormal losses then it affects the economic value of sustainability.