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Unformatted text preview: Shomu Banerjee ECON 101 Notes on Perfect Competition (PC) 2 Last time, we said we include a normal profit margin (NPM) to TC; think of the NPM as the minimum amount that the entrepreneur has to make so as for it to be worthwhile for him or her to undertake the risky business of running a business. Generally speaking, this NPM will be equal to or greater than the opportunity cost of the entrepreneur (how much he/she can make in the next best line of work). Therefore when a firm is breaking even, we say the firm is making normal profits . So the next to last graph we saw is called a situation of supernormal profits . Why should a firm produce if its making losses overall? Well, were talking here about the short-run, meaning that if the current situation of losses were to continue forever into the future, the would shut down to cut its losses and eventually liquidate its assets and exit this industry. But so long as things are not so grim, and you either have or can raise enough cash to cover your fixed costs in the short run, it may be worthwhile for you to keep producing. Lets see why....
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