Profit & Shutdown Points | A-Level Economics Notes
These revision notes cover everything you need to know about Shutdown Points for A-Level Economics. They're designed for students studying AQA A-Level Economics, Edexcel A-Level Economics, and Edexcel International A-Level Economics. Written by Jaisul Naik, UCL Economics graduate and A-Level Economics tutor since 2017.
What is profit?
Profit is the difference between total revenue and total costs.
Profit is also the entrepreneur's reward for taking a risk.
Why is profit different in economics?
In economics, profit also factors in the opportunity cost of running a business.
Economic profit = total revenue - (total costs + opportunity costs).
What is normal profit?
Normal profit is made when a business owner makes zero economic profit.
Normal profit is made when total revenue = total costs + opportunity costs
Normal profit is the minimum amount of profit needed for an entrepreneur to remain in the business in the long-run.
Example of a cafe earning a normal profit each month
Total revenue = £10,000
Total costs = £7,000
Opportunity costs = £3,000
What is supernormal profit?
Supernormal profit is made when any profit that exceeds normal profit.
Example of a cafe earning supernormal profit each month
Total revenue = £15,000
Total costs = £7,000
Opportunity costs = £3,000
What is the shutdown point in the long-run?
The long-run shutdown condition is when AR<AC.
Example of a cafe that would shut down in the long-run
Total revenue = £10,000
Total costs = £7,000
The cafe owner can make £3,000 a month by running the cafe
Opportunity costs = £4,000
The cafe owner is better off without the cafe where they could earn £4,000 a month.
Example of a cafe that would not shut down in the long-run
Total revenue = £10,000
Total costs = £7,000
The cafe owner can make £3,000 a month by running the cafe
Opportunity costs = £2,000
The cafe owner is better off by continuing to run the cafe.