3.3.4 - NORMAL, SUPERNORMAL PROFITS AND LOSSES

Question 1

What are profits?

Answer 1

Profits (represented by the symbol pi) are total revenue - total costs.
TR-TC
The TC takes into account both implicit and explicit costs.

Question 2

What are total costs?

Answer 2

Total costs consist of explicit costs and implicit costs.

Question 3

What are explicit costs?

Answer 3

These are the physical costs, which are the fixed and variable costs.

Question 4

What are implicit costs?

Answer 4

These are the opportunity costs

Question 5

What is profit maximisation?

Answer 5

This is when MC = MR.

Question 6

What are normal profits?

Answer 6

This is the minimum level of profit required to keep FoP in their current use.
This occurs when AC=AR
We need to draw the bottom part of the AC curve touching the AR line.

Question 7

What are supernormal profits ?

Answer 7

This is when the profit is greater than the normal profit.
This occurs when AR > AC.
We need to draw the AC curve below the AR line.

Question 8

What is a loss?

Answer 8

This is when total costs are greater then total revenue. It is when AC>AR. On a graph, to demonstrate a loss, we must draw the AC curve above the AR line.

Question 9

Drawing profit diagrams

Answer 9

Always draw MC=MR first and label this Qpimax.

Extend the profit maximisation ditted line to AR and AC and go horizontal.

Where AR goes horizontal to the profit axis, label this P and you can label everything else whatever.

Question 10

Shut down points

Answer 10

In the short run, this is when AVC>AR.