Normal profits, supernormal profits and losses

Question 1

What are the three types of profit?

Answer 1

Normal profit
Supernormal profit
Subnormal profit

Question 2

What is normal profit?

Answer 2

It is the minimum profit needed to keep the factors inputs in their current use in the long run.
These profits have opportunity costs.

Question 3

What is supernormal profit?

Answer 3

When the profit achieved in excess to normal profit
When AR > AC

Question 4

What is subnormal profit?

Answer 4

This is profit less than normal profit
Also known as an economic loss

Question 5

What is the importance of profit?

Answer 5

Finance for capital investment and research
Market entry
Demand for and flow of factor resources
Signals about health of the economy

Question 6

What are some strategies to increase profts?

Answer 6

Reduce overheads costs
Increase labour productivity
Move up the value chain
Discount prices
Find new customers

Question 7

What are some short run points for profit?

Answer 7

In the short run a firm will supply their products as long as price per unit is greater than or equal to average variable cost.
Providing that P>AVC, then the firm will stay in the market in the short run because there is a contribution being made to covering the fixed costs of production

Question 8

What are some long run points for profit?

Answer 8

A business needs to make at least normal profit in the long run to justify remaining in an industry.
Firms can survive while making a loss because the manager are satisficing
Losses might be cross-subsidided by profits in another sector/market.