3.3.4 - Normal Profits, Supernormal Profits & Losses

Question 1

What Are Explicit Costs?

Answer 1

Physical costs, which have to be paid.

Question 2

What Are Implicit Costs?

Answer 2

Opportunity costs of production.

Question 3

How Is Profit Calculated?
(2 Points)

Answer 3

~ TR - TC.

~ Total costs include the implicit and explicit costs.

Question 4

What Is Normal Profit?
(2 Points)

Answer 4

~ Minimum level of profit required, to keep FOPs in their current use.

~ Occurs when AC = AR.

Question 5

What Is Supernormal Profit?
(2 Points)

Answer 5

~ Any profit made above normal profit.

~ Occurs when AR > AC.

Question 6

What Is Subnormal Profit?
(2 Points)

Answer 6

~ Any profit made below normal profit, where a firm fails to cover its costs.

~ Occurs when AR < AC.

Question 7

Show What Would Happen If There Was An Increase In Revenue, On The Revenue Costs Diagram
(2 Points)

Answer 7

~ MR and AR, would shift outwards.

~ There would be large SNP.

Question 8

Show What Would Happen If There Was A Decrease In Revenue, On The Revenue Costs Diagram
(2 Points)

Answer 8

~ MR and AR, would shift inwards.

~ There would be smaller SNP.

Question 9

Show What Would Happen If There Was An Increase In Variable Costs, On The Revenue Costs Diagram
(2 Points)

Answer 9

~ AC and MC, would shift upwards.

~ There would be a loss.

Question 10

Show What Would Happen If There Was A Decrease In Variable Costs, On The Revenue Costs Diagram
(2 Points)

Answer 10

~ AC and MC, would shift downwards.

~ There would be large SNP.

Question 11

Show What Would Happen If There Was An Increase In Fixed Costs, On The Revenue Costs Diagram
(3 Points)

Answer 11

~ AC, would shift upwards, intersecting AC at its lowest point.

~ MC, would be unaffected.

~ There would be a loss.

Question 12

What Is The Short-Run Shut Down Point?

Answer 12

AR = AVC.

Question 13

Describe The Short-Run Shut Down Point
(3 Points)

Answer 13

~ AR > AVC, firm would stay in the market, as it could still make a profit, allowing them in the LR to pay off their FC.

~ AR < AVC, firm would leave the market, as it will be making a loss.

~ Always draw with ATC and AVC.

Question 14

What Is The Long-Run Shut Down Point?

Answer 14

AR = ATC.

Question 15

Describe The Long-Run Shut Down Point
(2 Points)

Answer 15

~ AR > ATC, firm would stay in the market, as it is making a profit.

~ AR < ATC, firm should leave the market, as it is making a loss.