3.3.4 - Profit

Question 1

a) Condition for profit maximisation

Answer 1

• where difference between TR and TC is greatest (where TR>TC)
• MC=MR

Question 2

b) supernormal profit

and diagram

Answer 2

• The profit over and above normal profits
• AR >AC (condition)
• When TR > TC

Question 3

b) Normal Profit

Answer 3

• the minimum level of profit required to factors of production in their current use
• Costs include level of profit needed to keep producer in the marker and to cover opportunity cost => if firm covers its costs, it earns normal profit
• AC = AR (condition)
• TC = TR, Break even point, when economic profit = 0

Question 4

b) Subnormal/losses

Answer 4

• Where the firm fails to cover its costs
• AR < AC (condition)
• TR < TC

Question 5

c) Short-run and long-run shut-down points: diagrammatic
analysis

Answer 5

• When making a loss, it is not necessarily the best decision to shut down => dependent on AVC
• If AVC>AR then firm should leave industry as producing more increases loss
• In LR, firms need to make at least normal profit for them to survive
• in SR, they should produce as long as TR covers TVC hence SR shut down where AVC=AR