profits

Question 1

what does economic profit take into account?

Answer 1

should take into account the opportunity cost of the capital invested and the income that the owner couldve earned elsewhere

Question 2

how do you calculate profit?

Answer 2

total revenue (TR) - total cost(TC)
TC= opportunity cost

Question 3

what does it mean if profit is 0?

Answer 3

if profit= 0 → normal profit

Question 4

what is normal profit?

Answer 4

firm is making just enough money to stay in the market
no other use of their time that will make them more money

Question 5

what does it mean if TR=TC?

Answer 5

normal profit is being made

Question 6

what happens if a firm is making less than normal profit?

Answer 6

if firm is making less than normal profit it will leave the market → no longer covering its opportunity cost
TR< TC

Question 7

when does subnormal profit occur?

Answer 7

price< AC→ subnormal profit

Question 8

what happens if a firm is making sub normal profit?

Answer 8

in the long run if a firm is making sub normal profit→ wont cover opportunity cost → leave

Question 9

what is supernormal profit?

Answer 9

• profit achieved in excess of normal profit
• when price > AC

Question 10

what does it mean when price is greater than AC?

Answer 10

supernormal profit is being made

Question 11

what does it mean when TR>TC?

Answer 11

supernormal profit is being made

Question 12

what happens when supernormal profit is being made?

Answer 12

incentive for other producers to enter a market to acquire some of this profit

Question 13

what is positive marginal profit?

Answer 13

positive marginal profit→ the increase in profit when one more unit is sold

Question 14

draw a price/cost curve and show all the points?

Answer 14

Question 15

what does it mean if marginal profit= 0?

Answer 15

marginal profit = 0 → at profit max output

Question 16

how would you show profit maximising on a diagram?

Answer 16

P1, B, Q1, O= total revenue

Question 17

how would you calculate total profit from a diagram?

Answer 17

(P1 - C1) x Q

Question 18

draw a price takers loss diagram

Answer 18

Question 19

where is the profit maximising point

Answer 19

when MR=MC

Question 20

how do you work out where a firm would produce on a C/R diagram and where it’s costs are

Answer 20

where MR=MC
then draw down to where that point would meet AC to find it’s costs

Question 21

what is the importance of profits

Answer 21

source of finance- can be reinvested
supernormal profit acts as a signal for firms to enter the market
signs of a healthy economy

Question 22

what are some strategies to increase profit

Answer 22

reduce overhead costs
increase labour productivity
outsource production to low cost suppliers
develop new products with low PED (make it more inelastic) and high YED
enter new markets

all of these strategies either increase total revenue to decrease total costs

Question 23

what is the shut down point and explain why this is the case

Answer 23

the price at which the firm isnt making enough profit to cover its variable cost
this is because the fixed cost has to be paid regardless of output so that wouldve already been paid
if the firm carries on producing theyd have to pay their workers so if they arent able to they should stop producing and leave the market