Profit Flashcards
define profit and state how to calculate profit
profit is the difference between total revue and total cost
- calculation: profit = TR-TC
what is normal profit and state what this means for the firm
when total revenue is equal to total cost.
- So profit TR-TC is 0.
- means the firm is make just enough revenue to cover its total cost and stay in the market
what is a profit loss and state what this means for firms and what this will look like on a diagram
when total revenue is less than total cost. on diagram, P < ATC
- means the firms is no longercovering its opportunity cost - so it will leave the market.
what is abnormal/supernormal profit
when total revenue is greater than total cost
- means there is extra profit above the opportunity cost
what state will occur in the short run to make firms stay in the market and why
- if Price > AVC (even if a firm is making a loss because of high fixed costs)
- because the firms will still be able to make some money on each sale
- The firm will use this money to pay off some of its fixed costs, so in the long run, they can break even and eventually make a profit
what state will occur in the short run to make firms leave the market and why
- If price < AVC
- firm will leave the market because it’s not covering its average variable costs, the firm is now making a loss on even unit sold
- firm will shut down/ leave to avoid making further losses
where is the short run shutdown point in the short run
- Where AR (price) = AVC
whee is the long run shut down point and why is it at that point
- the long run shutdown point is when price (AR) = ATC
- why? ATC = AVC + 0 (AVC + AFC, but AFC is zero because there are no fixed costs in the long run = ATC = AVC
what state will occur in the long run to make firms stay in the market and why
- price is >ATC
- the firm will stay in the market because it is covering its average total costs
- selling each of its units for higher than the average cost of producing it = the firm is making profit on each unit it sells
state the free market definition of profit
the reward that entrepreneurs yield when they take risks and make investments.
How will decrease in demand affect cost and revue curve?
demand decreases:
- MR/AR will decrease
- P/Q decrease
- olds firm will lower their price to compete with new firm
How will increase in demand affect cost/ revue curve?
If demand increases:
- AR/ MR curve will shift outwards
- AR/ MR will increase
- P/Q will increase
How will increasing variable costs (ATC and MC) affect firms/ cost and revenue curve.
Why may Q decrease, what is the profit after the costs increase
Price increase:
- for MC/AC increase
- Q decreases
Why?
- firms have to pay more to supply = will not be able to supply as much = put prices higher to cover costs
- profit after costs increase = profit loss
How will decrease in variable costs (ATC/MC) affect cost and revenue curve.
Explain why Q may increase
P decrease:
- MC/AR decrease
- P decreases but Q increases
Why?
Because it’s cheaper to produce G/S = firms can our prices down.
How will an increase in fixed cost affect the cost and revue curve?
- P/Q will not change but profit decreases
