B2.01.06: Profits and Losses

Question 1

Define normal profit

Answer 1

The minimum level of profit required to keep FOP in their current use

Question 2

Define subnormal profit

Answer 2

Any economic profit below normal profit i.e. an economic loss - profit made is not enough to cover the OC of production

Question 3

Define abnormal profit

Answer 3

Any profit made above normal profit that is an economic profit that is positive

Question 4

What symbol is used to formulate profit

Answer 4

π

Question 5

Formula for profits

Answer 5

π : TR - TC

Question 6

Examples of total costs

Answer 6

• Physical Costs : TFC & TVC
• Opportunity Costs

Question 7

What are physical costs

Answer 7

Explicit costs

Question 8

What are implicit costs

Answer 8

Opportunity

Question 9

Define accounting proft

Answer 9

Only considers explicit costs

Question 10

When does normal profit occur

Answer 10

When AR = AC

Question 11

When does abnormal profit occur

Answer 11

When AR > AC

Question 12

When does subnormal profit

Answer 12

When AR < AC

Question 13

Define Profit

Answer 13

The difference between total revenue and total costs

Question 14

Define marginal cost

Answer 14

The addition to total cost of one extra unit of output

Question 15

Define marginal revenue

Answer 15

The increase in total revenue resulting from an extra unit of sales

Question 16

What can also be used to find the profit maximising level of output

Answer 16

Marginal cost and Marginal revenue

Question 17

How is profit maximising level of output found

Answer 17

• When the difference between TR and TC is greatest
• or when MR = MC

Question 18

In what cases will a firm make economic profit, zero economic profit and negative economic profit (a loss)

Answer 18

• Economic profit = price > ATC
• Zero economic profit = price = ATC (this is also known as breaking even)
• Negative economic profit (a loss) = price < ATC