3.3.3 Profit Flashcards
What is profit ?
It is reward to the entrepreneur for organising all the factors of production
What is the formula for profit ?
TR - TC
When we dicsuss costs what else do we include as well as physical costs ?
We also inlcude the opportunity cost. For example the OC of working for another company making more profit
What is normal profit ?
This is when normal profit is equal to 0. This is where you have just enough (minimum level) profits to stay in the market
What does normal profit cover ?
It covers the difference between the revenue and both implicit and explicit costs
What does it mean if a firm makes less than normal profit ?
a profit loss will occur and the firm does not cover the opportunity cost so they will leave the market. TR is less than TC
What does it mean if a firm makes more than normal profit ?
It makes supernormal/abnormal profit. This is when TR is higher then TC. This is the extra profit above the opportunity cost
When you combine the costs and revenue diagram together what curve are to be drawn ?
AR, MR, MC, ATC
What do you do at marginal cost and marginal revenue ?
You sell and you produce to get those costs and those revenues
When MR is higher than MC and what would a firm do ?
This means there is more revenue gained from selling an extra unit than producing an extra unit. Therefore, a firm would produce more quantity to gain more profit
What is the profit maximisation point ?
This is when MC is equal to MR
What happens when a firm produces more quantity after the Qmax point ?
The company will make 0 profit and end up gaining a profit loss as MC is higher than MR.
What is the MOST IMPORTANT RULE when you work out the profit maximisation price on the graph ?
YOU SHOULD NEVER SCROLL LEFT FROM THE MR=MC POINT AS THIS WILL ONLY GIVE THE MR AND MC. YOU HAVE TO SCROLL UPWARDS TO THE DEMAND CURVE AND TO THE LEFT TO GET THE PMAX POINT
When ATC is above the Pmax point what happens and why ?
There will be a profit loss because TC is higher than TR. There are more OC
What does it mean if a firm is breaking even ?
TR = TC. IT is making normal profits
