3.3.4

Question 1

What is normal profit?

Answer 1

The minimum profit needed to keep factor inputs in their current use in the long run.

Question 2

What do normal profits reflect?

Answer 2

The opportunity cost of using funds to finance a business

Question 3

When firms are making supernormal profits there is an incentive for what?

Answer 3

Other producers to enter a market

Question 4

How are supernormal profits made?

Answer 4

-Firms in perfectly competitive markets
-Monopolistic competition and competitive oligopolies
-Collusive oligopolies and monopolies.

Question 5

How are firms in perfectly competitive markets make supernormal profits?

Answer 5

In the short run, before new entrants have eroded their profits down to a normal level

Question 6

How are monopolistic competition and competitive oligopolies make supernormal profits?

Answer 6

Firms in less competitive markets under monopolistic competition and competitive oligopolies, innovating and reducing costs earning head start profits

Question 7

How do collusive oligopolies and monopolies make supernormal profits?

Answer 7

Highly uncompetitive markets where they erect barriers to entry to protect themselves from competition in the long run and earn persistent above normal profits.

Question 8

What is subnormal profit?

Answer 8

Profits less than normal also known as economic loss.

Question 9

What is the importance of profits?

Answer 9

-Finance for capital investment and research
-Market entry
-Demand for and flow of factor resources
-Signals about health of the economy
-Shareholders expect a return

Question 10

What are strategies to increase profits?

Answer 10

-Reduce overhead costs so average cost per unit falls
-Increase labour productivity
-Move up the value chain
-Discount prices if demand is estimated to highly price elastic
-New customers in new markets