3.4.7 - Profit

Question 1

What is profit?

Answer 1

The difference between total sales revenue and total cost of production.

Question 2

How should people think about a loss in terms of profit?

Answer 2

Negative profit.

Question 3

What is the single assumption made about firms?

Answer 3

The want to maximise profits.

Question 4

What is profit maximisation?

Answer 4

The level of output at which total profit is the greatest.

Question 5

What are the secondary objectives of firms?

Answer 5

Survival
Growth
Increasing market share

Question 6

What does behavioural economics question within traditional economics?

Answer 6

Questions the assumption that consumers and entrepreneurs are completely rational decision-makers.

Question 7

What is normal profit?

Answer 7

The minimum profit a firm must make in order to stay in busines.

Question 8

What is normal profit insufficient for?

Answer 8

Insufficient to attract new firms into the market as there are no added profits to be made.

Question 9

What is abnormal profit?

Answer 9

Profit over or above normal profit.

Question 10

What does abnormal profit contain?

Answer 10

Super-normal profit

Question 11

How do economists treat normal profit?

Answer 11

As an opportunity cost.

Question 12

What happens to firms who are unable to make normal profit in the long run?

Answer 12

They leave the market.

Question 13

Normal profit is the same in each market. T / F?

Answer 13

False, it varies depending on the risks facing firms within each different market.

Question 14

What economic function does abnormal profit do?

Answer 14

Attracts new firms into the market.

Question 15

What does supernormal profit do within firms?

Answer 15

The managers will be incentivised to make the business even more profitable.

Question 16

What could be said of abnormal profits?

Answer 16

It acts as a ‘magnet’ for other firms to enter the market.

Question 17

What does an added influx of firms mean to a market? (No / easy barriers to entry)

Answer 17

Market supply increases, and within competitive markets this triggers a process in which abnormal profits and prices are reduced.

Question 18

What does a supernormal profit within a market mean in terms of profits? (High barriers to entry)

Answer 18

Profit may just reward inefficient producers leading to a form of market failure in which the ‘producer is king’ and where ‘producer sovereignty’ reigns.

Question 19

What can profit be an example of?

Answer 19

Economic efficiency.

It suggests that a firm has eliminated unnecessary costs of production.

Question 20

Where is profit not necessarily an indicator of economic efficiency?

Answer 20

Monopolistic markets.

Question 21

What roles does profit perform in a market economy?

Answer 21

Creation of worker / shareholder incentives.
Influences allocation of resources.
Reward for innovation.
Reward for risk-taking.
Efficiency-indicator.

Question 22

How does profit provide the creation of worker incentives?

Answer 22

Some firms will choose to allocate profit-related pay in an effort to increase worker motivation.

This can become counter-productive if the managers / directors receive a huge bonus and ordinary workers make far less.

Question 23

What company uses worker incentives?

Answer 23

John Lewis and Partners.

Question 24

How does profit provide the creation of shareholder incentives?

Answer 24

High profit generally leads to high dividends being paid out to shareholders who own companies.

Question 25

How does profit lead to decisions on resource allocation?

Answer 25

High profits made by a firm within a market creates incentives for new producers to enter a market.

Conversely, if sub-normal profits are made by firms, then firms will exit the market.

Question 26

How does profit provide a reward for innovation (and therefore risk taking)?

Answer 26

If entrepreneurs believe that innovation can lead to higher profits in terms of the future, then the incentive to innovate increases.
As the future is never certain, risks are always involved, but successful risk taking leads to high profits.

Question 27

How does profit provide a source of business finance?

Answer 27

The increased profit can be reinvested into the company to fund projects such as innovation or worker incentives.
High profits also allow firms to borrow more money at better rates.

Question 28

Revenue is different to profit. T / F?

Answer 28

True.

Question 29

What is profit sharing?

Answer 29

Shareholders sharing in the profit of the firm.