3.3.4 Normal profits, supernormal profits and losses

Question 1

What is the formula for total profit

Answer 1

TR-TC

Question 2

What is the formula for average profit and what is average profit ?

Answer 2

• The profit made per unit
  total profit / quantity

Question 3

What is the formula for marginal profit and what is marginal profit

Answer 3

• The additional profit earned by selling one more unit
• Change in Profit / Change in Q

Question 4

What is normal profit?

Answer 4

• The amount of profit required to keep a firm in an industry

Question 5

What is supernormal profit ?

Answer 5

• Any profits earned above normal profit

Question 6

What are losses?

Answer 6

Profits earned below normal profit

Question 7

What are the three conditions for profit ?

Answer 7

Normal profit - AR=AC
Supernormal - AR>AC
Losses - AR<AC

Question 8

What is the condition for profit maximisation ?

Answer 8

When a business earns the largest difference between TR and TC in a market

Question 9

When is profit maximisation achieved in a firm

Answer 9

MC = MR

Question 10

Explain how profit maximisation occurs when MC=MR

Answer 10

• Decision point , When MR>MC, firm should increase production
• When MC>MR, firm should stop production.
• MR=MC, this is the maximum amount of profit a firm can make.