3.2.4 Normal and Supernormal Profits and Losses

Question 1

Define normal profits

Answer 1

Normal profit is the amount of profit needed to keep the factors of production in their current use.

Question 2

Define opportunity cost

Answer 2

Opportunity cost is the next best alternative foregone when an economic decision is made.

Question 3

Define supernormal profit

Answer 3

Supernormal profit is profit above and over normal profit. SP=TR-TC

Question 4

What is the profit maximising condition?

Answer 4

Marginal costs = Marginal revenue

Question 5

What is meant by an economic loss?

Answer 5

A loss is where total costs are higher than total profits

Question 6

What is the short run shut down position?

Answer 6

This is where a firm is not able to cover their total variable costs with their revenue.

Question 7

What is the long run shut down position?

Answer 7

In the long run, a firm will shut down if they are not able to cover all their costs.

Question 8

Explain the role of profit in an economy?

Answer 8

Profit acts as an incentive for risk taking amongst firms, and as a signal for firms to enter or leave a market.