3.2.3 Profits

• Profit is the difference between a business's revenue and its costs.
• Normal profit is the minimum level of profit needed to cover opportunity costs.


  True
• What type of profit indicates a business is earning more than the minimum required to stay in business?

  Supernormal profit
• Match the factors influencing profitability with their descriptions:

  Lower costs ↔️ Increases supernormal profit

  Higher prices ↔️ Increases revenue if demand is inelastic

  Improved efficiency ↔️ Reduces costs and boosts profitability

  Less competition ↔️ Allows higher prices and profits
• How is profit calculated?

  Revenue minus costs
• Normal profit is the minimum level of profit a business needs to cover its opportunity
• Supernormal profit is any profit earned above the level of normal
• Supernormal profit often occurs in highly competitive markets.

  False
• How does innovation influence profitability?

  Premium pricing opportunities
• If a business generates $500,000 in revenue and incurs $400,000 in costs, the profit is $100,000.

  True
• Profitable businesses often enjoy better financial stability
• What does a business make if its costs are greater than its revenue?

  Loss
• Normal profit ensures a business stays operational as it compensates for alternative investment options.
• Supernormal profit exceeds the opportunity costs of a business.


  True
• Steps to calculate profit:

  1️⃣ Subtract total costs from total revenue

  2️⃣ Ensure all costs and revenue are accurately accounted for
• Profit is the financial gain after deducting all costs from revenue.


  True
• What do opportunity costs refer to in the context of normal profit?

  Potential earnings elsewhere
• Normal profit is the lowest level of profit required for a business to remain viable.


  True
• What does supernormal profit indicate about a business?

  Exceptional business performance
• Match the factor influencing profitability with its effect:

  Costs ↔️ Lower costs increase profit

  Prices ↔️ Higher prices increase revenue

  Efficiency ↔️ Improved processes reduce costs
• Profit is calculated using the formula: Revenue - Costs = Profit
• In what areas does profit play a significant role in business decisions?

  Resource allocation and pricing