3.3.4 - Normal profits, supernormal profits and losses

Question 1

What is marginal profit

Answer 1

The increase in profit when one more unit is sold or the difference between MR and MC. If MR = £20 and MC = £14 then marginal profit = £6.

Question 2

Define normal profit

Answer 2

• return that is sufficient to keep FOP committed to the business
• so costs include the level of profit needed to keep the priudcer in the market and cover the opportunity costs
• Normal profit is where AC=AR or TC=TR

Question 3

Define profit

Answer 3

The excess of revenue over expenses; or a positive return on an investment

Question 4

Define profit maximisation

Answer 4

Profit maximization occurs when marginal cost = marginal revenue (MC=MR).

Question 5

Define supernormal profit

Answer 5

A firm earns supernormal profit when its profit is above that required to keep
its resources in their present use in the long run i.e. when price > average cost
(P>AC).

Question 6

Define shut down price

Answer 6

In the short run the firm will continue to produce as long as total revenue
covers total variable costs or put another way, so long as price per unit > or
equal to average variable cost (P>AVC)

Question 7

When should a business shut down in short run

Answer 7

if revenue doesn’t cover variable costs

Question 8

When should a business not shutdown in the short run

Answer 8

• if revenue covers variable costs and there is income to contribute to fixed costs
• if revenue covers variable costs and there isn’t income to contribute to fixed costs

Question 9

What is shutdown point

Answer 9

shut down point for a perfectly competitive firm (and all firms for that matter) occurs when the firm is not covering average variable costs

Question 10

check pages 2 and 3 on ls5

Answer 10

DO it

Question 11

when is profit maximised for firms with pricing power

Answer 11

when distance between TR above of TC is as large as possible

Question 12

When is a firm said to earn supernormal profit

Answer 12

if revenue is higher than costs

Question 13

When is a firm said to earn normal profits

Answer 13

if revenue and costs are equal

Question 14

What happens if the firms doesn’t earn a normal profit

Answer 14

would cease to produce in the long run

Question 15

What costs are included by economists

Answer 15

private costs and opportunity cost

Question 16

What is a loss

Answer 16

where firm fails to cover costs, AR<AC or TR<TC

Question 17

REFER TO SHORT RUN AND LONF RUN SHUT DOWN POINTS on PMT DETAILED 3.3 NOTES