B2.01.06: Profits and Losses Flashcards
Define normal profit
The minimum level of profit required to keep FOP in their current use
Define subnormal profit
Any economic profit below normal profit i.e. an economic loss - profit made is not enough to cover the OC of production
Define abnormal profit
Any profit made above normal profit that is an economic profit that is positive
What symbol is used to formulate profit
π
Formula for profits
π : TR - TC
Examples of total costs
- Physical Costs : TFC & TVC
- Opportunity Costs
What are physical costs
Explicit costs
What are implicit costs
Opportunity
Define accounting proft
Only considers explicit costs
When does normal profit occur
When AR = AC
When does abnormal profit occur
When AR > AC
When does subnormal profit
When AR < AC
Define Profit
The difference between total revenue and total costs
Define marginal cost
The addition to total cost of one extra unit of output
Define marginal revenue
The increase in total revenue resulting from an extra unit of sales
What can also be used to find the profit maximising level of output
Marginal cost and Marginal revenue
How is profit maximising level of output found
- When the difference between TR and TC is greatest
- or when MR = MC
In what cases will a firm make economic profit, zero economic profit and negative economic profit (a loss)
- Economic profit = price > ATC
- Zero economic profit = price = ATC (this is also known as breaking even)
- Negative economic profit (a loss) = price < ATC
