3.3.4 - Normal profits, supernormal profits and losses Flashcards
When calculating costs, what do economists include ?
Both internal costs and opportunity costs
What is the equation for profit ?
profit = revenue - costs
What is normal profit ?
Normal profit is the minimum reward necessary to keep factors of production in their present use.
When revenue and costs are equal
What will happen if a firm fails to make normal profit ?
It would cease to produce in the long run
What is supernormal profit ?
This is when revenue is higher than costs and the firm is making profit
How does a firm choose its output level if it wishes to maximise profits?
To maximise profits, the firm needs to choose the output level at which total revenue is as far above the total cost curve as possible
What is the profit maximisation level on a graph ?
MC = MR
What happens if a firm is producing less than MR = MC ?
It will find that the marginal revenue from selling an additional unit of output is higher than the marginal cost of producing it, so the firm can add to its profits by increasing output.
What happens if a firm is producing more than MR = MC ?
It will find that the marginal revenue from selling an extra unit fails to cover the cost of producing the unit, so will not pay the firm to produce beyond that point.
What is a shutdown point ?
The shutdown point for a perfectly competitive firm occurs when the firm is not covering average variable costs.
What is required for a firm to stay open in the SR ?
As long as you make a contribution to your fixed costs, you will stay open, in the short run
