3.3.4: Profits

Question 1

What is profit?

Answer 1

• The difference between Total Revenue-and Total Costs.

Question 2

What are the three types of profit?

Answer 2

• Normal Profit
• Supernormal Profit
• Subnormal Profit

Question 3

What is normal profit?

Answer 3

• Normal profit is the return that is sufficient to keep the factors or production committed to the business.
• It covers the opportunity cost of investing funds into the firm and not elsewhere.

Question 4

What is supernormal profit?

Answer 4

• Profit that is greater than normal profit
• It is also known as abnormal profit.

Question 5

How does supernormal profit affect the demand to enter an industry?

Answer 5

• Supernormal profits leads to an incentive for other producers to entre the industry to try to acquire some of this profit for themselves.

Question 6

When is profit maximised?

Answer 6

• When TR and TC are furthest apart, with TR above TC.
• It also occurs when MC=MR
• Sometimes MC and MR my cross at two points and thus profit maximising point is where marginal cost rises as it crosses the MR line.

Question 7

What is a loss?

Answer 7

• A loss is where the firm fails to cover its costs
• AR<AC or TR<TC.

Question 8

Why do firms not always shut down when making a loss?

Answer 8

• It depends on the average variable cost.
• If AVC< AR then firms should continue production.
• This is as each good will generate more revenue than the cost of production, and so this will help them to reduce the size of the loss by covering some of the fixed cost.
• However, if AVC>AR then producing more goods will increase the loss, meaning the firms should leave the industry immediately.