profits Flashcards
what does economic profit take into account?
should take into account the opportunity cost of the capital invested and the income that the owner couldve earned elsewhere
how do you calculate profit?
total revenue (TR) - total cost(TC)
TC= opportunity cost
what does it mean if profit is 0?
if profit= 0 → normal profit
what is normal profit?
firm is making just enough money to stay in the market
no other use of their time that will make them more money
what does it mean if TR=TC?
normal profit is being made
what happens if a firm is making less than normal profit?
if firm is making less than normal profit it will leave the market → no longer covering its opportunity cost
TR< TC
when does subnormal profit occur?
price< AC→ subnormal profit
what happens if a firm is making sub normal profit?
in the long run if a firm is making sub normal profit→ wont cover opportunity cost → leave
what is supernormal profit?
- profit achieved in excess of normal profit
- when price > AC
what does it mean when price is greater than AC?
supernormal profit is being made
what does it mean when TR>TC?
supernormal profit is being made
what happens when supernormal profit is being made?
incentive for other producers to enter a market to acquire some of this profit
what is positive marginal profit?
positive marginal profit→ the increase in profit when one more unit is sold
draw a price/cost curve and show all the points?
what does it mean if marginal profit= 0?
marginal profit = 0 → at profit max output
how would you show profit maximising on a diagram?
P1, B, Q1, O= total revenue
how would you calculate total profit from a diagram?
(P1 - C1) x Q
draw a price takers loss diagram
where is the profit maximising point
when MR=MC
how do you work out where a firm would produce on a C/R diagram and where it’s costs are
where MR=MC
then draw down to where that point would meet AC to find it’s costs
what is the importance of profits
source of finance- can be reinvested
supernormal profit acts as a signal for firms to enter the market
signs of a healthy economy
what are some strategies to increase profit
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
what is the shut down point and explain why this is the case
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
