4.7 Profit Flashcards
What is profit?
Total revenue-total costs
What is profit maximisation?
Occurs at the level of output at which total profit is greatest
What is a loss?
A negative profit( total costs> total revenue)
What is a normal profit?
Minimum profit a firm must make to stay in business, which is however insufficient to attract new firms or the market ?
What is abnormal profit?
Profit above normal (also know as supernormal profit)
Why do firms leave the market in the long run?
Because they are unable to make normal profit
In the long run what do supernormal profits cause?
More firms to enter the market as long as there is no barriers to exit or entry
What does new firms entering the market do to supernormal profit ?
Triggers a process which reduces supernormal profit and prices(which benefits the consumer)
What happens to profits for monopolies?
-reward insufficient producers because of the producer “sovereignty”
What other things does profit cause in the economy?
-creation of worker and shareholder incentives
-influences the allocation of resources
-efficiency indicator
-reward for risk taking
-source or business finance
How can profit cause an incentive for workers?
-profit related pay motivates workers to work harder (can be counterproductive if managers get significantly more than workers)
How can profit create shareholder incentives?
-leads to dividends and creates more people wanting to buy the shares
How does profits affect resource allocation?
High profits create incentives for new producers to enter the market and for existing firms to supply more or a good or service
(Making losses would cause firms to leave the market and decrease overall supply)
How is profit a reward for innovation and risk taking?
-innovation is an improvement on something already done
-successful risk taking leads to greater profits
How are profits a source or business finance?
-profit can be retained within a business and are a more source of finances for firms undertaking investment projects(high profits make it easier for firms to borrow in the future
