Profit

• What is profit?

  The reward for risk taking, and the difference between revenues and costs
• What is profit maximisation?

  A situation where a firm cannot increase its profits, whether through increasing or decreasing price or output
• What is the profit maximisation point?

  The point where MC = MR, or where the cost of making one more unit is exactly equal to the revenue gained from selling that unit
• What is the alternative profit maximisation point?

  The point where marginal profit is 0
• What does a firm make a profit?

  At a lower output when marginal cost is below marginal revenue, meaning more profit can be made by increasing output
• When does a firm make a loss?

  At a higher output when marginal cost is above marginal revenue, meaning more profit can be made by decreasing output
• What is normal profit?

  The minimum amount of profit necessary to keep risk taking resources in their current use
• What is the normal profit point?

  The point where AC = AR
• What is the effect of normal profit on businesses?

  It does not encourage other firms to enter the market, nor does it cause firms to want to leave the market
• What is the relationship between normal profit and risk?

  The amount of normal profit varies according to the level of risk involved as well as other investment opportunities available
• What is supernormal profit?

  All profit made above normal profits
• What is the supernormal profit point?

  The difference between AC and AR
• What is a loss?

  When a firm's total costs are above their revenues
• What is the break even point?

  The level of output where normal profits are made, or where AC = AR
• What is the shut down point?

  The level of output where firms can't cover their average variable costs in the short run