profits Flashcards

1
Q

calculating profit

A

total revenue - total costs

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2
Q

what is normal profit and when does it occur

A

when total revenue = total costs which include running costs and salaries etc so a net profit of 0 for the firm itself

aka - normal profit is the minimum level of profit needed to keep resources in their current use in the long term

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3
Q

what is supernormal profit and when does it occur

A

when total revenue is greater than total costs

therefore it means the revenue generated from using the factors of production in this way is greater than any other way

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4
Q

why is supernormal profit competed away

A

this extra profit can be used to reinvest into the firm and incentivises other firms to come to the market

the competition will force prices down and so there is less revenue

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5
Q

what is the shut down point

A

when total revenue is less than total variable costs because when you include fixed costs its even worse

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6
Q

why is it a bad idea to shut down if you are making a loss but the total revenue is greater than total variable costs

A

any revenue more than variable cost will help pay off fixed costs so its better to keep going to pay off fixed costs

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7
Q

when is profit maximised

A

when MC = MR

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8
Q

what should a firm do to output if MR is greater than MC

A

increase output because revenue is greater than the cost of producing it

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9
Q

what should a firm do if MR is less than MC

A

decrease output because it costs more to produce the last unit than the revenue gained

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