profit

• what is profit?

  Profit = total revenue (TR) - total costs (TC)
• what do total costs include?

  Total costs include explicit and implicit costs
• what are explicit costs?

  Explicit costs are the costs which have to be paid e.g raw materials, wages etc.
• what are implicit costs?

  Implicit costs are the opportunity costs of production. This is the cost of the next best alternative to employing the firm's resources. Implicit costs must be considered, as entrepreneurs will rationally reallocate resources when greater profits can be made elsewhere
• what are the 3 types of profit?

  normal, supernormal/abnormal, losses
• what is normal profit?

  Normal profit occurs when TR = TC This is also called breakeven
• what is abnormal/supernormal profit?

  Abnormal (supernormal) profit occurs when TR > TC. occurs in monopoly firms where output is reduced and prices are increased to exploit consumers.
• what is a loss?

  A loss occurs when TR < TC
• what is the role of profit in the central economy?

  incentive for innovation and entrepreneurship

  Allocation of resources

  competition

  economic growth

  wealth creation
• how is profit an incentive for innovation and entrepreneurship?

  Profit serves as a reward for successful entrepreneurship and innovation. Entrepreneurs take on risks to start businesses or develop new products/services with the expectation of making a profit. It encourages individuals to innovate, leading to economic growth and improved standards of living
• how does profit help with allocation of resources?

  In a market economy, profit serves as a signal for resource allocation. When businesses earn profits, it indicates that they are meeting consumer demands efficiently. This encourages the reallocation of resources (capital, labour, and land) towards the production of goods and services that consumers value most, thereby enhancing economic efficiency
• how does profit help with competition?

  Profit serves as a measure of business success and efficiency. In a competitive market, firms strive to maximise profit by improving productivity, lowering costs or enhancing the quality of goods and services. This competition benefits consumers by providing them with better products at lower prices
• how does profit help with wealth creation?

  Profit generation leads to wealth creation for businesses, shareholders, and employees. It enables businesses to accumulate capital, which can be reinvested or distributed to shareholders as dividends. Employees also often benefit from profit-sharing schemes or performance-based bonuses
• how does profit help with economic growth?

  Profitable businesses reinvest their earnings into expanding operations, research and development, and hiring more workers. This investment stimulates economic growth, creates jobs, and generates technological advancements. More corporation tax = more government revenue
• what can excessive focus on profit maximisation cause?

  excessive focus on profit maximisation without considering social and environmental factors can lead to negative externalities, such as environmental degradation, income inequality, or exploitation of labour. While profit is a crucial driver of economic activity, it should be pursued within the framework of ethical and sustainable business practices
• what is profit maximisation?

  when MC=MR, marginal profit is 0
• what do rational firms want do?

  maximise profit
• what is the short-run shut down point?

  price (AR)=AVC
• if a loss making firm's AR>AVC in the short run, should they stay in the market?

  They should stay in the market because they still make money on each sale to make profit and pay off their fixed costs. Eventually the firm will be able to make long run profit.
• if a loss making firm's AR<AVC in the short run, should they stay in the market?

  The firm should shut down and leave the market.
• what does the gap between AVC and ATC on a short run shut down point diagram represent?

  average fixed costs.
• what happens to costs in the long run? there are no fixed costs, all costs are variable.

  there are no fixed costs, all costs are variable. ATC=AVC+0

  ATC=AVC
• what is the long run shut down point?

  Price (AR)=ATC
• in the long run, when should firms stay in the market?

  Price (AR)>ATC
• in the long run, when should firms leave the market?

  Price(AR)<ATC