5- Profit Flashcards
Where on a graph is the profit maximizing point?
- Where marginal cost= marginal revenue
- Where total revenue is most above total cost
When is normal profit achieved?
Average revenue=average costs
When is super/abnormal profit achieved?
Average revenue > average costs
When is subnormal profit acheived?
Average revenue < Average cost
Profit definition
The reward gained by risk taking entrepreneurs when the revenue earned from selling a given amount of output exceeds the total costs of producing that output.
Total profits equation
= Total revenue (TR) - Total costs (TC)
Normal profit definition
In markets which are perfectly competitive:
- It is defined as the minimum reward that is just significant enough to keep entrepreneur supplying their enterprise.
Supernormal/ abnormal profit definition
All the excess profit a firm makes above the minimum return necessary to keep a firm in business.
- EXTRA PROFIT ABOVE NORMAL PROFIT
- LEADS TO AN INCENTIVE FOR OTHER FIRMS TO ENTER THE INDUSTRY
Sub-normal profit definition
Sub-normal profit is any profit less than normal profit – where price < average cost. If a firm is making an economic loss, it may decide to leave a market in the long run in search of higher expected returns.
Where is the point of revenue maximisation found?
When Marginal revenue (MR) =0
Where is the point of sales maximisation found?
When Average cost (AC) = Average revenue (AR)
AC=AR
Marginal cost equation
Marginal cost = change in total cost / change in quantity
Marginal revenue equation
Marginal revenue = change in total revenue / quantity
Marginal profit definition
The extra profit gained when one more unit is produced.
What is profit maximisation?
It occurs where firms cannot increase its profits, whether by increasing or decreasing price or output.
