profits Flashcards
calculating profit
total revenue - total costs
what is normal profit and when does it occur
when total revenue = total costs which include running costs and salaries etc so a net profit of 0 for the firm itself
aka - normal profit is the minimum level of profit needed to keep resources in their current use in the long term
what is supernormal profit and when does it occur
when total revenue is greater than total costs
therefore it means the revenue generated from using the factors of production in this way is greater than any other way
why is supernormal profit competed away
this extra profit can be used to reinvest into the firm and incentivises other firms to come to the market
the competition will force prices down and so there is less revenue
what is the shut down point
when total revenue is less than total variable costs because when you include fixed costs its even worse
why is it a bad idea to shut down if you are making a loss but the total revenue is greater than total variable costs
any revenue more than variable cost will help pay off fixed costs so its better to keep going to pay off fixed costs
when is profit maximised
when MC = MR
what should a firm do to output if MR is greater than MC
increase output because revenue is greater than the cost of producing it
what should a firm do if MR is less than MC
decrease output because it costs more to produce the last unit than the revenue gained
