5) Profit and Loss

Question 1

What is accounting profit?

Answer 1

TR-TC

Question 2

what is normal profit?

Answer 2

the return needed for a firm to stay in a market in the long run

Question 3

what is supernormal (abnormal or economic) profits

Answer 3

profits above normal profits

Question 4

what is a loss?

Answer 4

negative profit; TR - TC is negative because TC > TR

Question 5

what is economic cost?

Answer 5

total cost + opportunity cost

Question 6

under what circumstance do we use accounting profit as a measure?

Answer 6

If we do not include opportunity cost in Total Costs, then this is accounting profit

Question 7

under what circumstance do we use supernormal profit as a measure?

Answer 7

• If we include opportunity cost in Total Costs, then this is supernormal profit

Question 8

when should firms leave the market? what happens to normal profit?

Answer 8

To stay in the market, firms must make enough profit to cover their opportunity cost

• If the accounting profit is lower than opportunity cost, the firm would be better off using their resources elsewhere; they would leave the market

• So normal profit exactly equals opportunity cost

Question 9

where does profit maximisation occur?

Answer 9

MC=MR

Question 10

why does profit maximisation occur when MC=MR?

Answer 10

If the marginal revenue from the next sale is greater than the marginal cost of that sale, the next sale is contributing to profits so should be made

If the marginal revenue from the next sale is less than the marginal cost of that sale, the next sale makes a loss so should not be made

Production should therefore be increased until the marginal revenue of production equals the marginal cost of production to maximise profits