Profit Flashcards
What is accounting profit?
Accounting profit = TR - TC
If TR is greater then the firm is making a profit, if TC is greater then the firm is making a loss, if they are equal then the firm is at break even
How is profit per unit calculated?
Profit per unit = AR - AC
If AR is greater then profit is made per unit, if they are equal then no profit or loss is made per unit and if AC is greater then a less is made on units produced
What is economic profit?
Economic profit considers opportunity costs
(TR - TC) - opportunity cost
What does opportunity cost consider when talking about economic profit?
It considers the alternative accounting profit from a different market
Where is profit maximisation?
MR=MC
Why is MR = MC profit maximisation/ what does marginal revenue and marginal cost actually mean?
Marginal revenue is the price/ revenue received if we produce and sell an additional unit
Marginal cost is the cost of producing one more unit
If MR is greater there will be a marginal profit from producing another unit, the revenue gained from producing one more is greater than the cost
If MR=MC there is no marginal profit from producing one more unit as revenue from producing one more is the same as cost
If MC is greater there will be a marginal loss from producing another unit, the revenue gained from producing one more is less than the cost
How do you work out total revenue?
Price x quantity or Average revenue x quantity
How do you work out total costs?
Average costs x quantity
Total fixed costs + total variable costs
What is normal profit and where is it?
Normal profit is just enough profit to stay in the market but not enough to attract new firms
It is when TR = TC
What is supernormal (abnormal) profit?
This is when profit is above normal profit
What is subnormal (abnormal) profit?
This is when an economic loss is being made, TR<TC although an accounting loss may not be occurring
How do profits lead to more allocative efficiency?
Increased demand will mean that there is more supernormal profit. As there is more demand the market is now under supplying so the supernormal profit signals firms to join so that demand can be met. Same thing if decreased demand, subnormal profit firms leave so excess supply is reduced
