3.3.4 Profit Flashcards
what is the formula for profit?
profit = total revenue- total costs (including opportunity costs)
total costs always incude opportunity costs
what is normal profit?
- when profit= 0 (TR = TC)
- just enough to stay in the market (break even)
- will stay in the market, becuase opportunity cost is covered
what is a loss (less than normal profit) ?
- TR < TC
- will leave the market because cannot cover opportunity costs
what is supernormal profit?
- TR> TC
- extra profit above the opportunity cost
draw a cost revenue diagram
- MR, AR, MC, ATC
show profit on a cost revnue diagram
show loss on a cost revnue diagram
show an increase in demand on cost revenue diagram
increase in demand–> increase in revenue
show an increase in variable costs
(increase in fuel prices)
show an increase in fixed costs
only increases ATC (= AVC + AFC)
marginal costs unaffected
when should firms stay in the market?
in loss
- when price(AR) > AVC
- in the short run, they will still be making some money on each sale, can be used to pay off large fixed costs in the long run, breaking even and eventually make a profit in the long run
when should a firm leave the market?
in loss
- in the short run price(AR) < AVC
- can no longer cover variable costs, loss on every unit sold
what is the short run shut down point?
when AVC= price (AR)
below this, should shut down
above this, should stay in the market
draw short run shut down point on cost revenue graph
show both shut down and stay in market
have to add AVC
what is the long run shut down point?
in long run, no fixed costs so ATC= AVC
* when AR (Price) = ATC
draw a diagram of long run shut down points
only need OG 4 lines
draw table for long run / short run shut down points
