Profit And Profit Maximising And Efficiency Flashcards
Accounting profit
TR - TC
TR= p x q, TC= fc x vc
economic profit
Also consider OC of being in business, which is a fixed cost, so included in TC figure
Profit maximisation
MC = MR
Normal profit
The min return needed for an entrepreneur to stay in business in the LR
Supernormal profit
Any profits in excess of normal profits
Why is profit max at MC = MR
If producing one more adds more to revenues than it does to cost ( i.e. MR is higher than MC), producing that must have increased profit
SR shut down conditions
If no longer covering variable costs (AR/p lower then AVC)
Rev max
MR = 0
Sales max
AR = AC
What efficiency is there in SR
Allocative but not productive as there are supernormal profits
What is allocative efficiency
When resources are used to produce things consumers demand, and so social welfare maximised
Where does allocative efficiency occur
P=MC
(If not equal there will be an over/under allocation of resources)
P=MC is welfare max
What is productive efficiency
When the fewest resources used to produce each product, so operating on lowest AC curve ( min resources used to produce the max output)
Where is productive efficiency in SR
Where MC = ATC
= min efficient scale
What is dynamic efficiency
When resources are allocated efficiently over time, investment
What is x-inefficiency
Not operating on lowest cost curve, happens due to lack of competition
Perfect comp: large no. firms
Each firms output is small in relation to the size of the market, also means firms act independent of one another
Perfect info
For both firms and consumers, consumers know market price so won’t pay higher
Prefect resource mobility
Easily transferred without any cost
Y all make normal profit in LR
D curve is derived from market equ , if making super new firms can join to bring it back down
Y perfect comp always elastic D
All identical substitutes
Minimum efficient scale
The lowest point on LRAC, =prod efficiency
