Profit

Question 1

What is the formula to calculate profit?

Answer 1

Profit = TR - TC

Question 2

What are normal profits?

Answer 2

The minimum level of profit required to keep a firm in the industry. The profit that covers all costs of production but provides no extra income above those costs.
- when total revenue = total costs

Question 3

What are supernormal profits?

Answer 3

Occurs when a firms total revenue exceeds its total costs. Firms earning more than enough to cover all costs, including the opportunity cost of the resources used. This is usually temporary as it attracts competition, which can drive down prices and reduce economic profit over time

Question 4

What is the importance of profit in an economy?

Answer 4

• encourages firms to cut costs and increase efficiency
• encourages entrepreneurs to create new products which may be profitable
• gives firms capacity to invest in R&D
• encourages resources to flow to profitable areas
• enables a rise in wages for workers
• gov tax corporate profit to gain revenue

Question 5

What are some of the problems with profit?

Answer 5

• inequality
• market failure
• monopoly

Question 6

How else is profit useful?

Answer 6

• Profit can be retained- kept within the firm and not given to shareholders as dividends, this can be a source of finance for firms if they choose to make investments - helps avoid costs of loaning money
• can also act as a signal to firms and consumers - e.g. firms with supernormal profits means more firms will want to join the market since its profitable - increases market supply and lowers market price (assuming contestable market with low barriers to entry)