Profit Maximization and Loss Minimization

Profit Maximization and Loss Minimization

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A firm in the short run earns an abnormal profit when at the equilibrium level of output, the market price is greater than the average cost or (AR > AC).

The firm is the short run is minimizing losses if the market price is smaller than average total cost but larger than average variable cost or ARC < AC > AVC

The firm at price OP, is covering its full variable cost and a part of fixed cost. The loss of part of fixed cost equal to the shaded area PTSN is less than the firm would incur by closing down. In case of shut down, the firm has to bear the total fixed cost ETSF. The firm thus by producing OK output and selling at OP price is minimizing losses.
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