Profits & Shut Down Points

Question 1

What is the equation for profit?

Answer 1

Profit = total revenue (TR) - total costs (TC)

Question 2

What is normal profit?

Answer 2

the profit that the firm could make by using its resources in their next bestuse; it is the profit needed to keep the firm in business; it is effectively a cost of production. Normal profit is earned when TR=TC

Question 3

What is supernormal profit?

Answer 3

also called abnormal profit is any profit over and above normal profit

Question 4

When does supernormal profit exist on a graph?

Answer 4

Supernormal profit exists when TR>TC; it is maximised when the vertical difference between TR and TC is greatest

Question 5

Show what happens up to and beyond output Q

Answer 5

Up to output Q, MR>MC so for each extra unit produced more is added to revenue (MR) than is added to costs (MC) so profit rises.
Beyond output Q, MR< MC so for each extra unit produced less is added to revenue (MR) than is added to costs(MC) so profit falls
Profit-maximisation occurs at the outwhere MC=MR.

Question 6

When will a firm have a shut down point?

Answer 6

If a firm is making losses it may decide to shut down.In the short run, it is assumed it will still have to pay its fixed costs

Question 7

When would a firm shut down in the short run?

Answer 7

The firm will shut down in the short run if:
Price per unit (AR) < average variable cost (AVC) or when total revenue (TR) < total variable cost (TVC)

Question 8

When would a firm shut down in the long run?

Answer 8

In the long run, all costs are variable, so the firm will shut down in the long run if:
Price per unit (AR) < average total cost (ATC) or when total revenue(TR) < totalcost (TC)