Profit

Question 1

What is profit?

Answer 1

Total revenue (TR) –Total costs (TC) or (AR –AC) × Q

Question 2

What is normal profit?

Answer 2

This occurs when TR = TC. This is the breakeven point for a firm. It is the minimum profit level necessary to keep the firm in the industry in the long run.

Question 3

What is supernormal profit?

Answer 3

This occurs when TR > TC. This is profit above the

breakeven point.

Question 4

What is operating profit?

Answer 4

This occurs where AR >AVC. W

hen average revenue is greater than average variable cost, the firm is making a contribution towards its fixed cost

Question 5

What is accounting profit?

Answer 5

This is the total monetary revenue-total costs. It is also known as the booking profit

Question 6

What is economic profit?

Answer 6

This is the total revenue-total monetary costs and opportunity costs. In other words economic profit requires not just a booking profit, but also to offer a better return than keeping the money in the bank at 3% interest.

Question 7

The Role of Profit

Answer 7

Incentive
signal
profit can be used for investment
tax, gives the gov tax

Question 8

What is profit maximisation?

Answer 8

Where MR = MC.

• If MR > MC, total profit rises.
• If MR < MC, total profit falls.
• Profit is therefore maximised at Q = 5, where MR=MC

•This diagram assumes that a firm can know its marginal cost and marginal revenue. However, in the real world,
they may not know exactly and make a best approximation

PROFIT MAXIMISATION DIAGRAM