3.3.4: Normal Profits, Supernormal Profits And Losses Flashcards
What is profit?
The difference between total revenue and total costs.
What are the two conditions for profit maximisation?
-Where TOTAL revenue and TOTAL costs are furthest apart (TR > TC).
-Where MARGINAL revenue (MR) = MARGINAL costs (MC).
Where is profit maximised?
(TR & TC)
Where is profit maximised?
(MR & MC)
What is normal profit?
The minimum return required to keep factors of production functioning (when total revenue = total costs, INCLUDING opportunity costs).
What is the difference between accounting profit and economic profit?
Accounting profit only looks at explicit profit (physical costs).
Economic profit looks at explicit profit (physical costs) and implicit profits (opportunity costs).
What is supernormal profit?
The profit above normal profit (when total revenue > total costs).
What is loss?
When a firm fails to cover their total costs.
What are other names for supernormal profit?
-Abnormal profit.
-Economic profit.
In the short term, if a firm is making a loss, at what point should the firm stay open and why?
If P > AVC, stay open.
This is because firms will still make revenue from selling goods/services, which can contribute to paying for factors of production.
In the short term, if a firm is making a loss, at what point should the firm shut down and why?
If P < (or =) AVC, shut down.
This is because firms will make a loss from selling goods/services, meaning that they can’t pay for factors of production.
In the long term, if a firm is making a loss, at what point should the firm stay open and why?
If P > ATC, stay open.
This is because firms will still make revenue from selling goods/services, which can contribute to paying for factors of production.
In the long term, if a firm is making a loss, at what point should the firm shut down and why?
If P < (or =) ATC, shut down.
This is because firms will make a loss from selling goods/services, meaning that they can’t pay for factors of production.
