Profit

Question 1

What is normal profit

Answer 1

The minimum profit needed to keep factor inputs in their current use in the long run

Question 2

Normal profits reflect

Answer 2

The opportunity cost of using funds to finance a business

Question 3

What is sub normal profit

Answer 3

Profit that is less than normal (price < ac)

Question 4

What is supernormal profit

Answer 4

Profit achieved in excess of normal profit (also known as abnormal profit) price > ac

Question 5

When firms are making abnormal profits..

Answer 5

There is an incentive for other producers to enter a market to acquire some of this profit

Question 6

What is the importance of profit in a market economy

Answer 6

1. Finance for capital investment and research
2. Market entry: rising supernormal profits send signals to other producers
3. Demand for and flow of factor resources: resources flow where the risk adjusted rate of profit is highest
4. Signals about health of the economy- rising profits reflect improvements in supply side performance

Question 7

Factors affecting profitability of businesses

Answer 7

• degree of market competition
• rate of growth of market demand
• price elasticities of demand for goods and services
• changes in cost factors