Profit and Loss Flashcards
Profit Formula
Profit = Revenue - Costs
Define Normal Profit
Minimum Reward necessary to keep factors of production in their present use
When does Normal Profit occur
Occurs when Revenue and Costs are equal
Costs are Private and Opportunity
What happens when a firm fails to earn normal profit
It would cease production in the long run
Define Supernormal Profit
Occurs when Revenue is higher than Costs
Costs are Private and Opportunity
When is Total Revenue directly proportional to the amount of output it sells
When a firm has no influence over the price of its product
At what point on a curve is profit maximised
The output level at which total revenue is as far above the total cost curve as possible
Describe the Marginal Cost and Marginal Revenue curves when looking at the profit maximisation decision given the firm has no influence over the price
Marginal Revenue is Horizontal
Marginal Cost has the U shape
What happens when a firm is producing less than q* (point of profit maximisation)
The marginal revenue from selling an additional unit of output is higher than the marginal cost of producing it - so they can add to its profit by increasing output
What happens when a firm is producing more than q* (point of profit maximisation)
The marginal revenue from selling an extra unit fails to cover the cost of producing the unit
When is the MC=MR rule obeyed
When firms want to maximise profit
Holds true in all market situations
Define Subnormal Profit
Profit which is less than normal
What is subnormal profit also known as
Making an economic loss
Define Retained Profit
Profit kept in the company rather than paid out to a shareholders as a dividend
Why is Profit important
Finances capital investment and research
Deters others from Market Entry
Demand for and flow of factor resources
Signals about health of the economy
How do shareholders gain financial reward
A share of the profits - dividends
Growth in the value of their shares
Effects of a rise in variable costs
Increases Marginal and Average Cost
Fall in Profit Maximises Output
Prices rise which helps partially absorb the rise in costs
Level of supernormal profit falls
Strategies to increase profit
Reduce overhead costs Increase labour productivity Find new customers in new markets Discount prices if demand is highly price elastic Move up the value chain
What does ‘moving up the value chain mean’
Invest in and develop new products with a lower PED and high YED so higher prices can be charged
