5.3.4

Profits

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Profit

Profit is the difference between revenue and costs.

Equation for profit

Equation for profit

  • Profit = total revenue - total costs.
Normal profit

Normal profit

  • When total revenue is equal to total cost, a firm is said to be generating normal profit.
  • In the long run, normal profit is the minimum a firm can be making to be sustainable.
  • In a perfectly competitive industry, firms can only make normal profit.
Supernormal profit

Supernormal profit

  • When total revenue exceeds total costs, a firm is said to be generating supernormal profits.
  • The existence of supernormal profits signals to firms that they should enter the market.
  • Their ability to do this depends on the barriers to entry and level of contestability.
Short run profits

Short run profits

  • In the long run, a firm must make at least normal profits.
  • But in the short run, at least one factor of production is fixed.
  • If the firm makes enough revenue to cover its variable costs, and begin to pay off its fixed costs, operations can continue.
  • The shut down point is the revenue where a firm just covers its variable costs. Below this point the firm will cease production immediately.

Profit Maximisation

Traditional economic theory says that firms aim to maximise profits.

When is profit maximised?

When is profit maximised?

  • When marginal cost is equal to marginal revenue, a firm is profit maximising.
  • If marginal cost is less than marginal revenue, the firm could increase profit by expanding production.
  • If marginal cost is greater than marginal revenue, the firm could increase profit by reducing output.
Profit can be a signal to enter a market

Profit can be a signal to enter a market

  • The existence of supernormal profits in an industry signals to potential entrants that they should enter the market.
  • Supernormal profits will be competed away if new firms enter.
  • This logic relies on a number of assumptions about the contestability of markets.
Jump to other topics
1

Introduction to Markets

1.1

Nature of Economics

1.1.1Economics as a Social Science1.1.2Positive & Normative Economic Statements1.1.3The Economic Problem1.1.4Resources1.1.5Production Possibility Frontiers1.1.6Specialisation & Division of Labour1.1.7Types of Economies1.1.8End of Topic Test - Nature of Economics1.1.9Application Questions - Nature of Economics
1.2

How Markets Work

1.2.1Rational Decision Making1.2.2Demand1.2.3Elasticities of Demand1.2.4Elasticities of Demand 21.2.5Elasticity & Revenue1.2.6Supply1.2.7Elasticity of Supply1.2.8Price Determination1.2.9Price Mechanism1.2.10Consumer & Producer Surplus1.2.11Indirect Taxes & Subsidies1.2.12A-A* (AO3/4) - Taxing Prices or Quantities?1.2.13Alternative View of Consumer Behaviour1.2.14End of Topic Test - Markets1.2.15A-A* (AO3/4) - Markets
2

Market Failure

2.1

Market Failure

2.1.1Types of Market Failure2.1.2Externalities2.1.3The Deadweight Welfare Loss of Externalities2.1.4A-A* (AO3/4) - The Externalities of Education2.1.5Public Goods2.1.6Information Gaps2.1.7End of Topic Test - Market Failure2.1.8Application Questions - Market Failure
2.2

Government Intervention

2.2.1Government Intervention in Markets2.2.2Subsidies & Price Controls2.2.3Pollution Permits & Regulation2.2.4A-A* (AO3/4) - European Emissions Trading2.2.5State Provision & Information Provision2.2.6Government Failure2.2.7End of Topic Test - Government Intervention2.2.8A-A* (AO3/4) - Government Intervention
3

The UK Macroeconomy

3.1

Measures of Economic Performance

3.1.1Measuring Economic Growth3.1.2National Income Data3.1.3Inflation3.1.4Causes of Inflation3.1.5Consequences of Inflation3.1.6Employment & Unemployment3.1.7Causes & Impact of Unemployment3.1.8A-A* (AO3/4) - Hysteresis3.1.9Balance of Payments3.1.10Current Account Deficit & Imbalances3.1.11End of Topic Test - Economic Performance3.1.12Application Questions Macroeconomy
3.2

Aggregate Demand

3.2.1Aggregate Demand3.2.2Consumption3.2.3Investment3.2.4Government Expenditure3.2.5Net Trade3.2.6End of Topic Test - Aggregated Demand3.2.7Application Questions - AD
3.3

Aggregate Supply

3.3.1Aggregate Supply3.3.2End of Topic Test - Aggregated Supply3.3.3A-A* (AO3/4) -Aggregate Supply
3.4

National Income

3.4.1National Income3.4.2Injections & Withdrawals3.4.3Equilibrium Level of Real National Output3.4.4Multiplier Effect3.4.5End of Topic Test - National Income3.4.6Application Questions - National Income
3.5

Economic Growth

3.5.1Causes of Economic Growth3.5.2Output Gaps3.5.3Business Cycle3.5.4Impact of Economic Growth3.5.5End of Topic Test - Economic Growth3.5.6A-A* (AO3/4) - Growth
4

The UK Economy - Policies

4.1

Macroeconomic Objectives & Policies

4.1.1Possible Objectives4.1.2Demand-Side Policies - Monetary4.1.3Demand-Side Policies - Monetary 24.1.4A-A* (AO3/4) - The Future of Interest Rates4.1.5Demand-Side Policies - Fiscal4.1.6Demand-Side Policies in 2007-084.1.7Strengths & Weaknesses of Demand Side4.1.8Supply-Side Policies4.1.9Supply-Side Policies 24.1.10Conflicts Between Objectives4.1.11A-A* (AO3/4) - Conflicting Incentives4.1.12Phillips Curve4.1.13End of Topic Topic - Policies & Objectives4.1.14Application Questions - UK Policies
5

Business Behaviour

5.1

Business Growth

5.1.1Size & Types of Firms5.1.2Business Growth5.1.3Pros & Cons of External Expansion5.1.4Demergers5.1.5End of Topic Test - Business Growth5.1.6A-A* (AO3/4) - Business Growth
5.2

Business Objectives

5.2.1Business Objectives5.2.2End of Topic Test - Business Objectives5.2.3Application Questions - Business Objectives
5.3

Revenues, Costs & Profits

5.3.1Revenue5.3.2Costs5.3.3Economies & Diseconomies of Scale5.3.4Profits5.3.5Profits 25.3.6End of Topic Test - Revenue, Costs & Profits5.3.7A-A* (AO3/4) - Revenue, Costs & Profit
6

Market Structures

6.1

Market Structures

6.1.1Efficiency6.1.2Perfect Competition6.1.3Perfect Competition 26.1.4Monopolistic Competition6.1.5Oligopolies6.1.6The Prisoner's Dilemma6.1.7Collusion in Oligopolistic Markets6.1.8A-A* (AO3/4) - Which Factors Affect Collusion?6.1.9Monopolies6.1.10Price Discrimination6.1.11Monopsony6.1.12A-A* (AO3/4) - Models in Economics6.1.13Contestability6.1.14Benefits of Contestability6.1.15End of Topic Test - Market Structures6.1.16Application Questions - Market Structures6.1.17A-A* (AO3/4) - Cereal Collusion
6.2

Labour Market

6.2.1Demand for Labour6.2.2Supply of Labour6.2.3Labour Market Imperfections6.2.4A-A* (AO3/4) - Labour Productivity & Unemployment6.2.5A-A* (AO3/4) - What Level of Unionisation is Good?6.2.6Wage Determination6.2.7Elasticity of Labour Supply & Demand6.2.8Intervention in Setting Wages6.2.9End of Topic Test - Labour Market6.2.10A-A* (AO3/4) - Labour Markets
6.3

Government Intervention

6.3.1Reasons for Government Intervention6.3.2Government Promotion of Competition6.3.3Usefulness of Competition Policy & Examples6.3.4A-A* (AO3/4) - Modern Competition Policy6.3.5Privatisation6.3.6Government Regulation6.3.7A-A* (AO3/4) - Nationalisation vs Privatisation6.3.8Government Protection of Suppliers and Employees6.3.9Impact of Government Intervention6.3.10End of Topic Test - Government Intervention6.3.11Application Questions - Government Intervention
7

A Global Perspective

7.1

International Economics - Globalisation & Trade

7.1.1Globalisation7.1.2Globalisation for LEDCs7.1.3Globalisation for MEDCs7.1.4Specialisation & Trade7.1.5Pattern of Trade7.1.6Terms of Trade7.1.7Trading Blocs7.1.8UK, EU & WTO7.1.9End of Topic Test - Globalisation & Trade7.1.10A-A* (AO3/4) - Globalisation & Trade
7.2

International Economics - Currency

7.2.1Merged Currency7.2.2Restrictions on Free Trade7.2.3Arguments for Protectionism7.2.4Arguments Against Protectionism7.2.5Balance of Payments7.2.6Balance of Payments 27.2.7Floating Exchange Rates7.2.8Fixed Exchange Rate7.2.9International Competitiveness7.2.10End of Topic Test - International Economy7.2.11Application Questions - International Economics
8

Finance & Inequality

8.1

Poverty & Inequality

8.1.1Absolute & Relative Poverty8.1.2Inequality8.1.3Inequality 28.1.4Lorenz Curve8.1.5Government Policy on Poverty8.1.6End of Topic Test - Poverty & Inequality8.1.7A-A* (AO3/4) - Inequality & Poverty
8.2

Emerging & Developing Economies

8.2.1Measures of Development8.2.2Factors Influencing Growth & Development8.2.3Barriers to Development8.2.4Barriers to Development 28.2.5A-A* (AO3/4) - The Bottom Billion8.2.6Development Strategies8.2.7Interventionist Strategies8.2.8Aid8.2.9International Institutions8.2.10International Institutions 28.2.11End of Topic Test - Emerging & Developing8.2.12Application Questions - Developing Countries
8.3

The Financial Sector

8.3.1Role of Financial Markets8.3.2Market Failure in the Financial Sector8.3.3Role of Central Banks8.3.4End of Topic Test - The Financial Sector8.3.5A-A* (AO3/4) - Financial Sector
8.4

Role of the State in the Macroeconomy

8.4.1Public Expenditure8.4.2Taxation8.4.3Public Sector Finances8.4.4End of Topic Test - Role of the State8.4.5Application Questions - Role of the State
9

Examples of Global Policy

9.1

International Policies

9.1.1Global Debt & Deficit Policies9.1.2Poverty & Inequality Policies9.1.3Changes in Interest Rates9.1.4Competitiveness Policies9.1.5End of Topic Test - International Policies9.1.6A-A* (AO3/4) - International Policies
9.2

Policy Responses to Shocks

9.2.1International Tax Policies9.2.2Problems for Policymakers9.2.3End of Topic Test - Policy Responses9.2.4Application Questions - Policy Responses

Practice questions on Profits

Can you answer these? Test yourself with free interactive practice on Seneca — used by over 10 million students.

  1. 1
    What is the term for when total revenue exceeds total costs?Multiple choice
  2. 2
    Types of profit:Fill in the list
  3. 3
    A firm may continue to function in the short-run, but not in the long-run when price is what?Multiple choice
  4. 4
    Explain the difference between normal and supernormal profits.Flashcard
  5. 5
    What is the assumption which implies that firms will only be able to make supernormal profit in the short run?Multiple choice
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Economies & Diseconomies of Scale

Profits 2