Profit – Normal, Supernormal and Losses

Profit – Normal, Supernormal and Losses

Courses Info

Level: AS Levels, A Level, GCSE – Exam Boards: Edexcel, AQA, OCR, WJEC, IB, Eduqas – Economics Revision Notes

Profit 

Profit is the difference between revenue and costs; it is the reward for risk-taking

Profit Maximisation

This occurs when MR = MC and is when a firm cannot raise its profit any more irrespective of increasing / decreasing the price or output

  • Marginal Profit – the additional profit gained from producing one extra unit
  • If MR > MC, the marginal profit will be positive as the revenue gained from producing on extra unit is greater than the cost of that when the firm is producing at a lower output of MR = MC
  • If MR < MC, the marginal profit will be negative as the cost of producing an extra unit is greater than the additional revenue gained when the firm is producing at a higher output of MR = MC

Normal Profit, Supernormal Profit, and Losses

 

Normal Profit

The minimum amount of profit needed for a firm to operate successfully

  • Where a firm makes a sufficient amount of revenue to cover its total costs and remain competitive in the market
  • Represents the cost of use of the entrepreneurship factor of production
  • Normal Profit occurs when AC = AR or TC = TR , which can also be known as the ‘break-even point’ in a perfectly competitive market
  • When firms make Normal Profit, the economic profit is zero

[diagram]

Supernormal Profit

When firms make a profit above the level of Normal Profit

  • Supernormal Profit is usually made by monopolies as they have the price making power to charge higher prices at a restricted level of output
  • There are barriers to entry and price > average costs
  • The sunk costs also deter other firms from entering the market, allowing monopolies to continue to charge higher prices and make a supernormal profit

[diagram]

Loss

A firm makes a loss when its TC > TR or the average cost of production is greater than the price per unit

[diagram]

The Effect of fewer firms in a market

  • Less competition
  • AR and MR curves will be steeper
  • The elasticity of demand will reduce
  • Each firm will make a greater proportion of supernormal profit

 

Quick Fire Quiz – Knowledge Check

1. Define ‘Profit’ (2 marks)

2. Identify the point at which firms profit maximise (2 marks)

3. Define ‘Marginal Profit’ (2 marks)

4. Explain what happens when a firm produces at MR > MC (4 marks)

5. Explain what happens when a firm produces at MR < MC (4 marks)

6. Define ‘Normal Profit’ (2 marks)

7. Using a diagram, explain what situations a firm will produce normal profit (6 marks)

8. Identify the ‘break-even point’ (2 marks)

9. Define ‘Supernormal profit’ (2 marks)

10. Using a diagram, explain what situations a firm will produce a supernormal profit (6 marks)

11. Using a diagram, explain what situations a firm will produce a loss (4 marks)

12. Explain the effect of having fewer firms operating in a market (4 marks)

 

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