Supernormal Profits

• What is the condition for profit maximization?

  Where marginal cost equals marginal revenue
• What is the difference between normal profit and supernormal profit?

  Normal profit is the minimum required to stay in business
• What does the term 'divorce between ownership and control' refer to?

  Principals employ agents to carry out tasks
• Why might managers pursue profit satisficing?

  To please shareholders and keep their jobs
• How can you identify the output level for profit maximization?

  By finding where total revenue exceeds total cost
• Why is the point of profit maximization where MC equals MR?

  Because it maximizes the difference between revenue and cost
• What is normal profit defined as?

  The minimum profit to keep a firm in business
• When does a firm make supernormal profit?

  When average revenue is greater than average cost
• What is the relationship between supernormal profit and market entry?

  It incentivizes new firms to enter the market
• What are the characteristics of a perfectly competitive market?

  • Many buyers and sellers
  • Homogeneous products
  • Free entry and exit
  • Perfect information
  • Firms are price takers
• What happens to market price when new firms enter due to supernormal profits?

  Market price decreases due to increased supply
• What is the significance of the intersection of MC and AC at the lowest point?

  It indicates the minimum average cost for the firm
• What does it mean for a firm to be a price taker?

  It cannot influence the market price
• What are the implications of perfect competition in the long-run?

  • Firms only make normal profit
  • Output determined by MC=MR
  • No barriers to entry or exit
  • Perfect information exists
• How does the presence of supernormal profits affect existing firms in the market?

  It leads to a decrease in profits for existing firms
• What is the formula for determining profit maximization in a firm?

  MC = MR
• What does it mean when AR equals AC?

  It indicates the firm is making normal profit
• What is the effect of increased supply on market price in perfect competition?

  It leads to a decrease in market price
• Why is it important for firms to have perfect information in a competitive market?

  It ensures fair competition and informed decisions
• What is the relationship between marginal revenue and average revenue in perfect competition?

  MR equals AR
• What happens to the demand curve for a firm in perfect competition?

  The demand curve is perfectly elastic
• How does the entry of new firms affect the supply curve in the market?

  It shifts the supply curve to the right
• What is the long-run outcome for firms in a perfectly competitive market?

  All firms earn normal profit