Normal Profits, Supernormal Profits & Losses

Question 1

Normal Profits

2

Answer 1

Transfer earnings of the entrepreneur e.g. The minimum reward necessary to keep them invested in the firms

Average Revenue = Average Total Costs
THIS DOESNT MEAN NO PROFIT IS MADE. Included in our total costs is the minimum level of recompense of the firm’s owners (enough to keep them invested)

Question 2

Normal Profit Diagram (u)

Answer 2

-

Average Total Costs = Average Revenue

Question 3

Supernormal Profit

Answer 3

Any profit that exceeds normal profit

Question 4

Short Run Shutdown Points

2

Answer 4

When Variable Costs exceed Price e.g. Make a chocolate bar for £1 and sell for 80p

It is rational that a firm should shut down at this point

Question 5

Long Term Shutdown Points

Answer 5

If a firm is making normal profit / losses in the short tun then they can still continue to operate as in the Long Run many variables can change in order for them to make supernormal profit

Question 6

Importance of Profit

4

Answer 6

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

Question 7

Key Factors Affecting Profitability

5

Answer 7

Degree of market competition - highly contestible markets often have lower prices and tendency to normal profits due to high competition

Rate of growth of market demand - E.g. in a recession demand falls and businesses have less pricing power

PED of goods and services - Potential to use price discrimination to increase profit in inelastic markets

Changes in cost factors - Variable costs can always change. Gov. regulations, taxes and subsidies also affect.

Exchange Rate Volatility - e.g Unilever heavily impacted after 2016 Brexit vote as pound fell significantly, had to organise new deals with all supermarkets in contract

Question 8

Subnormal Profit

Answer 8

Profit that is less than normal profit.

NOT MAKING A LOSS, profit is still being made.
It is an economic loss