Profit

Question 1

What is the distinction between accountants and economists profit?

Answer 1

For accountants, a businesses profit is simply the difference between their actual revenue and their actual costs.

However economists take a more complicated approach. They also take into account the opportunity cost of what the hairdresser could have earned, if they had done something else.

Question 2

What are the two main aspects of economists profit in reference to the opportunity cost? (How to make money elsewhere)

Answer 2

1- What could have been earned working for someone else
2-The interest that they could have earned on all of their money, if they put it into the bank instead of the business (Carrying basically no risk).

Question 3

What is normal profit?

Answer 3

economists refer to opportunity cost as normal profits. It refers to the minimum they have to earn running a business to make that business worthwhile (E.g. The amount they could have made doing something else)

Question 4

Why is normal profit seen as a cost?

Answer 4

Because the entrepreneur has to receive this money, otherwise they should close the business down, economists see normal profit as a cost.

Question 5

What is Supernormal profit?

Answer 5

If they earn any profit above normal profit, economists refer to it as super-normal profit.

Question 6

What is Subnormal profit?

Answer 6

If they earn below their normal profit, economists refer to it as subnormal profit.

Question 7

Maximising Profits

Answer 7

A basic assumption in economics is that most businesses are trying to maximise their profits. To do this, they will produce up to the point where the cost of the last good that they make (MC), is exactly equal to the amount of money they get from selling that product (MR)

I.e. They will produce q where MR=MC to maximise profit