LS5 - Profit & Loss

Question 1

How do economists calculate costs?

Answer 1

add together all:
- private/explicit costs
- opportunity/implicit costs

Question 2

profit formula

Answer 2

revenue - costs = profit

Question 3

normal profit

Answer 3

• total costs = total revenue
• minimum to keep factors of production in their use (as don’t make loss)
• if doesn’t make at least normal profit then wouldn’t produce in long run - better to change use of FofP to make normal profit

Question 4

Supernormal profit (abnormal)

Answer 4

TR>TC

Question 5

Profit maximisation (total cost/revenue)

Answer 5

• if price takers TR is linear
• when TR & TC cross = normal profit
• when TR above TC supernormal profit, largest gap is highest supernormal profit
• same for quadratic TR

Question 6

Profit maximisation (marginal cost/revenue)

Answer 6

• when firm has no control over price - so same revenue so MR is same - horizontal
• MC curve like quadratic with large +ve gradient
• profit max = MC=MR
• same applies when MR is linear
• to the right the marginal revenue won’t cover cost of selling extra good
• to the left MR>MC so can make more profits

Question 7

shut down point for firms

Answer 7

• when firms are not covering average variable cost
• can be possible to make loss in short run as long as it covers variable cost and therefore contributes to fixed costs

Question 8

short run shut-down point

Answer 8

when price is below AVC

Question 9

long run shut-down point

Answer 9

when price is below AC

Question 10

when will firms continue to operate?

Answer 10

when MC is above AVC