Profit

• Functions of profit:

  • Allows the price mechanism to work as an effective and efficient way of allocating scarce resources
  • Profit provides an incentive to invest and means for investment
  • Profit is a reward to risk taking entrepreneurial behaviour
  • Profit can promote efficiency
• Normal profit occurs when Total Revenue = Total Cost
• Supernormal profit occurs when Total Revenue > Total Cost
• Loss occurs when Total Revenue < Total Cost
• Profit Maximisation:

  
• The profit maximisation quantity is where MR = MC
• The Short Run Shut down point is the point which average revenue is equal to average variable cost
• Price (AR) > AVC: Stay in the market

  Price (AR) = AVC: Short Run Shut Down Point

  Price (AR) < AVC: Shut down
• The Long Run Shut Down point is the point where average revenue is equal to average total cost
• Price (AR) > ATC: Stay in the market

  Price (AR) = ATC: Long Run Shut Down Point

  Price (AR) < ATC: Shut Down