Normal Profits, Supernormal Profits and losses (3.3.4) Flashcards
What are explicit costs?
Costs which have to be paid
What are examples of explicit costs?
e.g. rent, utilities and wages etcc
What are implicit costs?
Costs are the opportunity costs of production
What are opportunity costs?
The loss of the next best alternative
What is an example of implicit costs?
E.g. if an investor puts £1m into producing bicycles and they could have put it in the bank to receive 5% interest, then the 5% represents an implicit cost
Which out of implicit and explicit costs does Total costs include?
Both
What is the equation for profit?
Total Revenue (TR)- Total Costs (TC)
When does normal profits occur?
TR=TC
What’s another name for normal profits?
Break-even
When does supernormal profits occur?
TR>TC
When does a loss occur?
TR<TC
In the short run if the AVC is higher than the AR (AR> AVC) should the firm keep producing?
Yes
In the short run if the AVC is the same as the AR (AR=AVC) should the firm keep producing?
No it should shut down
In the Long run if the AR is higher than the AC (AR> AC) should the firm keep producing?
Yes as making money
In the long run if the AR is the same or less than the AC (AR=AC) should the firm keep producing?
The firms should shut down as they are making a loss
When does Profit Maximisation happen on a graph?
MC=MR
