Profit Flashcards
What is profit?
Profit is the financial gain that results from the difference between total revenue and total costs in a business.
Example: If a company sells 100 units at £10 each, its total revenue is £1,000. If the total costs amount to £800, the profit is £200
What is the difference between normal and abnormal (supernormal) profit?
1)Normal Profit: The minimum level of profit necessary to keep a firm in its current line of business. It occurs when total revenue equals total costs, including opportunity costs
2)Abnormal (Supernormal) Profit: Profit that exceeds normal profit, indicating that total revenue exceeds total costs, including opportunity costs
Example: If a firm’s total revenue is £1,000 and total costs (including opportunity costs) are £800, the abnormal profit is £200.
What is the role of profit in a market economy?
1)Signal for Resource Allocation: High profits attract firms to enter a market, while low or negative profits signal firms to exit, ensuring resources are allocated efficiently
2)Incentive for Innovation: Potential for profit motivates firms to innovate and improve products and services
3)Reward for Risk-Taking: Profit compensates entrepreneurs for the risks they undertake in business ventures
Example: A tech startup that develops a successful new app earns supernormal profits, encouraging further innovation and investment in the technology sector.
