3.3.4 Normal Profits, Supernormal profits and losses Flashcards
1
Q
What is profit
A
Total revenue - Total costs
2
Q
What is included under total costs
A
Total Fixed costs
Total variable costs
opportunity costs
3
Q
What is normal profits
A
Minimum level of profit required to keep factors of production in current use
4
Q
What is supernormal profits
A
- any profit made above normal profits
- Profit when AR > AC
- When firms are making supernormal profits, there is an incentive for other producers to enter a market
5
Q
What is sub-normal profits
A
Any economic profit below normal profit
profit is not enough to cover opportunity cost
Also known as an economic loss
6
Q
How would you show supernormal profits on a diagram
A
Where price>costs
7
Q
Describe normal profits on a graph
A
Where Price=Cost
8
Q
Describe Subnormal profits on a diagram
A
Where costs>prices
9
Q
Importance of profits
A
- Dynamic efficiency - new innovative product, higher quality
- Demand for and flow of factor resources: Resources flow where the risk-adjusted rate of profit is highest
- Rising profits might reflect improvements in supply-side performance - and results of high aggregate demand in an economy
10
Q
Strategies to increase profit
A
- reduce overheads so average cost per unit falls
- Increase labour productivity - capital/labour substitution
- Lower prices if demand is elastic
- Enter new markets
11
Q
What is the short-run shut-down point
A
- firm will supply their products as long as price per unit is greater than or equal to average variable cost (i.e. where AR = AVC)
- contribution being made to covering the fixed costs of production
12
Q
What is the long-run shut down point
A
- needs to make at least normal profit in the long run to justify remaining in an industry
- Where P=AC
- This is long run because, firms can survive while making a loss because the managers are satisficing, or where a downturn is seen as
temporary and demand is expected to pick up again - Losses might be cross-subsidised by profits in another sector/market
