Profit

Profit Profit is the difference between Total Revenue and Total Costs. Profit= TR-TC

Normal Profit The minimum level of profit needed so that a firm will remain in the market.

Normal Profit The resources available to the firm are being efficiently used and could not be put to better use elsewhere.

Normal Profit Remember Bob and his creepy dolls?

Normal Profit Bob Borrowed CHF 100,000 to pay for the fixed costs of setting up the doll factory. If Bob made a 5% profit from the sale of his dolls, an accountant would consider that profit.

Normal Profit However: What if Bob could make a 20% return on his investment if he put that money in the stock market. Remember: Bob is a genius when it comes to predicting stocks. Or Lucky?

Normal Profit Economists would argue that the opportunity cost of not spending his CHF 100,000 in the market was greater than what he made on the dolls. Therefore, Bob would eventually get out of the doll business and go back to picking stocks.

Normal Profit So: Bob is not making a normal profit. The resources (CHF 100,000) could be put to better use.

Normal Profit Normal Profit: Total Revenue = Total Costs Do not forget: Imputed/Opportunity Costs are part of Total Costs. Normal Profit is considered to be a cost, so it is included in the costs of production.

Normal Profit Profits above this tend to encourage entry to the market, profits below tend to persuade firms to leave the industry.

Supernormal Profit Total Revenue is greater than Total Costs. This is also called Abnormal or Economic Profit. This Exceeds the value of the opportunity costs of investing in the firm. This level of profit also attracts others to the doll business.

Abnormal Profit What profit would Bob need to make to stay in the doll business?

Supernormal Profit This will attract new participants in a market.

Super normal Profit

Profit Maximisation Marginal Revenue = Marginal Costs MR = MC This is in a perfectly competitive market. Market 1 ( Remember)

Graph for profit maximisation

In this market, average revenue is equal to marginal revenue In this market, average revenue is equal to marginal revenue. So it is milk, not airline tickets. Between O and N, the firm is making a loss. Beyond M, the marginal cost is higher than the marginal revenue, so there is no point in producing beyond that point. So a profit maximising firm will produce at point E.

Short Term vs. Long Term In the Short Term a firm may be able to cover their variable costs, but not all of their total costs. They may decide to stay in business anyway. Maybe the market will improve.

Shut Down Price If a firm cannot even cover their variable costs, for example cloth for doll clothes, electricity bill. They will shut down.

Short Term vs. Long Term In the Long Term, a firm will only stay in business if they cover all of their costs. In other words they can pay their Average Total Costs.

Short Term vs. Long Term