Topic 4.7 Profit and 4.8 Technological Change

Question 1

Profit Definition/Formula

Answer 1

The difference between total revenue and total costs.
TR - TC

Question 2

Explicit and Implicit Total Costs

Answer 2

Explicit costs: physical costs such as total fixed costs and total variable costs.
Implicit costs: opportunity cost of production.

Economic/normal profit takes both explicit and implicit costs when considering profit. People such as accountants only take explicit costs into consideration.

Question 3

Economic vs Accounting Profit

Answer 3

Let’s say all 3 companies are currently making laptops.
Company A: £100,000, Company B: £110,000 and Company C: £90,000.
They could also profit (but are not) from selling tablets (opportunity cost).
Company A, B and C: £100,000.
So the normal profit is £0, £10,000 and a loss of £10,000 respectively.

Question 4

Normal Profit

Answer 4

Normal Profit is the minimum level of profit required to keep factors of production in their current use.
Normal profit = £0 (AR = AC)

Question 5

Supernormal/abnormal Profit

Answer 5

When economic profit > 0 (AR > AC).
Indicates that the firms have some sort of monopoly profit - may encourage new firms to enter the market.

Question 6

Subnormal profit

Answer 6

When economic profit < 0 (AC > AR)
Indicates you should be producing the other product (your opportunity cost)

Question 7

Creative destruction

Answer 7

Schumpeter’s name for the process by which firms using old technology that are unable to adapt are swept away by the new as they can no longer compete

Question 8

Invention

Answer 8

Invention is the process of creating a new product or a way to make a new product

Question 9

Innovation

Answer 9

The act of improving or contributing to existing products.