3.3.4 Normal profits, Supernormal profits and Losses
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11 Terms
Profit maximisation
The goal of a company to earn the highest level of profit possible.
Profit maximisation assumption
Assumes that a company has perfect information and can make rational decisions to increase profits.
Marginal Revenue (MR)
The additional revenue that is generated from selling one more unit of a good or service.
Marginal Cost (MC)
The cost of producing one additional unit of a good or service.
Condition for profit increase
When marginal revenue (MR) = marginal cost (MC).
MR > MC
Selling an extra unit adds to profit.
MR < MC
Selling an extra unit lowers profit.
Total profit formula
Total profit = (price - AC) * output.
Normal profit
The level of profit earned by a company or industry that is sufficient to keep it operating, but not so high that it would attract new firms into the industry.
Normal profit condition
Cost & Output where AR=AC.
Super normal profit
The level of profit above and beyond what is needed to cover all its costs including the opportunity cost of resources.