Profits Flashcards
What Is Profit?
Profit is the difference between revenue and cost.
What Is Total Profit?
What is left when total costs are deducted from total revenue.
Formula : Profit = TR – TC
A firm will make maximum profit when the difference between TR and TC is greatest.
What Is Average Profit?
Profit made from each unit of output sold.
It is the difference between AR and ATC (AC)
What Is Marginal Profit?
Additional profit made when an extra unit of output is sold.
It is the change in total profit due to a one-unit increase in units sold.
Formula: Marginal profit = change in total profit
change in output
What Is Normal Profit?
The minimum profit a firm must make to remain in business. It is sufficient to keep the firm in a particular industry (line of operation).
A firm will make normal profit when TR = TC.
If a firm fails to earn normal profit, it will cease production. It will switch resources to the production of other products.
What Is Supernormal Profit?
It is profit above normal profit.
It is also known as pure profit, abnormal profit or economic profit.
A firm makes abnormal profit when TR > TC.
What Are Impacts Of Shifts In Costs And Revenue Curves On Profits?
Changes in costs and revenue shifts in the cost and revenue curves leading to a change in the level of output and profits.
An increase in the price of raw materials will increase MC. The MC curve will shift upwards. The profit maximizing level of output will fall.
A fall in costs e.g. a fall in wage costs will shift the MC curve downwards. The profit maximising output will increase.
An increase in demand for the product will shift the AR and MR curve upwards (outwards). The profit maximizing level of output will increase.
A fall in demand for the product will shift the AR and MR curve downwards (inwards). The profit-maximising level of output will decrease.
What Are Shutdown Points?
Firms do not always make profits. A firm may continue in operation even if it does not cover the full total costs. Some firms operate at a loss.
What Is The Short - run Shutdown Point?
In the short-run a firm will continue in production as long as it can cover its variable costs.
It could make a loss equal to the uncovered fixed costs.
If a firm cannot cover its variable costs it will shut down i.e. when its TR < TVC or AR < VC.
What is The Long - run Shutdown Point?
In the long-run all costs are variable and must be covered for the firm to remain in business.
It should make normal profit.
AR must be equal to or greater than AC.
A firm will shut down when its AR < ATC or TR < TC.
What Reasons Could Cause A Firm To Remain In Business Even When It Does Not Cover Its Costs (make losses)?
In the short-run a firm can continue production as long as can cover its variable costs. However, in the long-run a firm will shut down production if it does not cover its full costs.
The firm may expect price to rise. This would increase its revenue and enable it to cover its costs.
The firm could manage to reduce its costs or increase its revenue to reduce the loss.
The firm could be in the public sector. It would receive government support through grants and subsidies.
A start-up firm may take some time to get established in the market and to make profit.
