3.3.4

Question 1

Condition for profit maximisation

Answer 1

Profit is the difference between Total revenue and total cost
The reward entrepreneurs yield when they take risks

Question 2

When does profit maximisation occur

Answer 2

When marginal cost= marginal revenue
Each extra unit produced gives no extra loss or no extra revenue

Question 3

Normal profit

Answer 3

The minimum reward required to keep entrepreneurs supplying their enterprise in the long run
Covers the opportunity cost of investing funds into the firm and not elsewhere
This is where Total revenue = total costs

Question 4

Supernormal profit

Answer 4

The profit above normal
Exceeds value of opportunity cost of investing funds into the firm TR>TC

Question 5

Losses

Answer 5

A firm makes a loss when they fail to cover their total costs

Question 6

Short run and long run shut down points

Answer 6

• A firm which profit maximises continues to operate in the short run P> AVC. This means firms continue to produce in the short run as long as variable costs are covered
• When shutting down, no variable costs are incurred by the firm, however, fixed costs have to be paid whether the firm shuts down or continues to produce.
• the shut down point is P<AVC, when variable costs cannot be covered- the lowest point in the AVC
• when a firm shuts down, it is a short run deceision
• in the long run, the firm can leave the industry and this will happen when TR<TC