3.3.6 Profit Flashcards
What is normal profit?
The minimum level of profit required to keep the factors of production in their current use in the long run.
What is subnormal profit?
Profit that is less than normal profit
What is supernormal profit?
When firms achieve profits higher than normal profit
In what scenario can abnormal/supernormal profit persist?
In imperfect competition markets where monopolies or oligopoly is present, as firms that try to enter the market to acquire some of these supernormal profits are barred from entry.
What is profit maximisation?
When marginal revenue = marginal cost
How can you find profit margin per unit of output?
The difference between price and average cost
Does a firm need to achieve normal profit in the short run in order to continue production?
No. In the short run a firm can produce as long as price per unit exceeds or is equal to average variable cost
What is Profit?
Profit measures the return to risk when committing scarce resources to a market or industry. Revenue - Cost
How will a decrease in profit caused by an increase in price be shown on a marginal cost/revenue diagram?
A down-right shift of the marginal cost curve
What are the roles of profit in market economy
- Finance for investment
- Market entry
- Demand for factor resources
- Signals about the health of the economy
How is finance for investment a role of profit in a market economy?
Retained profits are (allegedly) the most important source of finances for companies undertaking capital investment projects.
How is market entry a role of profit in a market economy?
Rising profits send signals to other producers. Supernormal profits in a market indicates that a profitable entry to the market could be possible. This is only relevant in contestable markets where one firm does not have a monopoly.
How is ‘demand for factor resources’ a role of profit in a market economy?
Scarce resources tend to flow where expected profit is highest. In markets where there is a lot of demand, factor resources (e.g. Land labour capital) tend to be committed more to that sector.
How does profit give signals about the health of the economy?
Rising profits may reflect improvements in supply side performance. Strong profits are the result of high demand from domestic and overseas markets. Conversely, profit warnings could indicate a macroeconomic downturn
