3.3.4 - Normal profits, supernormal profits and losses

Question 1

What is profit?

Answer 1

profit = TR-TC (profit maximisation), it is the difference between revenue and costs

Question 2

Total cost

Answer 2

profit includes opportunity cost (TC), TC is only profit maximised if it’s making more money than it possibly could anywhere else

Question 3

Marginal profit

Answer 3

MR > MC (the cost of making one extra) = Marginal profit, so sell that 1 extra item

Question 4

profit maximisation

Answer 4

MC=MR -> profit maximisation level of output

Question 5

profit equation

Answer 5

profit = TR - TC
TR = P×Q
TC = FC + VC + QC

Question 6

What is normal profit?

Answer 6

firm only covers its costs, doesn’t make any profit. remains the same, no better use

Question 7

Normal profit equation

Answer 7

AC=AR (TC=TR)

Question 8

What is supernormal profit?

Answer 8

this occurs if the firm makes more than normal profit, greater amount of profit

Question 9

Supernormal profit equation

Answer 9

AR>AC

Question 10

What is a loss?

Answer 10

the firm fails to cover its costs and should leave the market

Question 11

Loss equation

Answer 11

P>AVC

Question 12

What is the shut down rule?

Answer 12

Should a loss making company shut down?
Short run - NO
Long run - YES

Question 13

Shut down rule

Answer 13

in SR, if P>AVC then keep going. Short run has fixed costs, each item sold will help pay off some fixed costs (reduces total loss) -> increase in P, cut costs, then shut down.

If P<AVC, shut down immediately