Profit and Loss Flashcards
What is profit?
The difference between a firm’s revenues and its costs.
What is the formula for profit?
Profit = TR - TC
Profit = total revenue - total costs
What is normal profit?
The profit needed by a firm to stay competitive in the market. It occurs when the difference between a firms TR and TC is zero.
What is the MC = MR rule?
When the MC curve meets the MR curve, profits are maximised (MC = MR).
What are the 3 drawbacks to the MC = MR rule?
1) The model assumes firms know their MC and MR, but these values are difficult to know with precision.
2) The model does not consider the reaction of competitors, as an increase in output or price will often lead to a response by competitors.
3) Other factors, not just price, can effect quantity demanded, so it is hard to determine the effect of a change in price on QD.
What is supernormal profit?
When businesses make a profit above normal profits. It occurs when TR is greater than TC.
What is a loss?
When a firm’s TC is greater than its TR.
What is the area of supernormal profit on the cost and revenue diagram?
The area between the minimum point of AC, P1, P2, and the point where MC = MR = AR.
What is the shut-down point?
When there is no economic benefit to continue production, resulting in the temporary or permanent closing of a firm. This usually occurs when a firm is not making normal profits in the LR, and so cannot cover all costs.
What is the effect of firms making supernormal profits on the market?
New firms will be incentivised to join the market, increasing supply, and lowering the market price (ceteris paribus).
What is the effect of firms making losses on the market?
Firms will be incentivised to leave the industry, reducing supply.
