5.3.4
Profits
Profit
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
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.
1Introduction to Markets
1.1Nature of Economics
1.1.1Economics as a Social Science
1.1.2Positive & Normative Economic Statements
1.1.3The Economic Problem
1.1.4Resources
1.1.5Production Possibility Frontiers
1.1.6Specialisation & Division of Labour
1.1.7Types of Economies
1.1.8End of Topic Test - Nature of Economics
1.1.9Application Questions - Nature of Economics
1.2How Markets Work
1.2.1Rational Decision Making
1.2.2Demand
1.2.3Elasticities of Demand
1.2.4Elasticities of Demand 2
1.2.5Elasticity & Revenue
1.2.6Supply
1.2.7Elasticity of Supply
1.2.8Price Determination
1.2.9Price Mechanism
1.2.10Consumer & Producer Surplus
1.2.11Indirect Taxes & Subsidies
1.2.12A-A* (AO3/4) - Taxing Prices or Quantities?
1.2.13Alternative View of Consumer Behaviour
1.2.14End of Topic Test - Markets
1.2.15A-A* (AO3/4) - Markets
2Market Failure
2.1Market Failure
2.2Government Intervention
2.2.1Government Intervention in Markets
2.2.2Subsidies & Price Controls
2.2.3Pollution Permits & Regulation
2.2.4A-A* (AO3/4) - European Emissions Trading
2.2.5State Provision & Information Provision
2.2.6Government Failure
2.2.7End of Topic Test - Government Intervention
2.2.8A-A* (AO3/4) - Government Intervention
3The UK Macroeconomy
3.1Measures of Economic Performance
3.1.1Measuring Economic Growth
3.1.2National Income Data
3.1.3Inflation
3.1.4Causes of Inflation
3.1.5Consequences of Inflation
3.1.6Employment & Unemployment
3.1.7Causes & Impact of Unemployment
3.1.8A-A* (AO3/4) - Hysteresis
3.1.9Balance of Payments
3.1.10Current Account Deficit & Imbalances
3.1.11End of Topic Test - Economic Performance
3.1.12Application Questions Macroeconomy
3.2Aggregate Demand
3.3Aggregate Supply
3.4National Income
4The UK Economy - Policies
4.1Macroeconomic Objectives & Policies
4.1.1Possible Objectives
4.1.2Demand-Side Policies - Monetary
4.1.3Demand-Side Policies - Monetary 2
4.1.4A-A* (AO3/4) - The Future of Interest Rates
4.1.5Demand-Side Policies - Fiscal
4.1.6Demand-Side Policies in 2007-08
4.1.7Strengths & Weaknesses of Demand Side
4.1.8Supply-Side Policies
4.1.9Supply-Side Policies 2
4.1.10Conflicts Between Objectives
4.1.11A-A* (AO3/4) - Conflicting Incentives
4.1.12Phillips Curve
4.1.13End of Topic Topic - Policies & Objectives
4.1.14Application Questions - UK Policies
5Business Behaviour
5.1Business Growth
5.2Business Objectives
6Market Structures
6.1Market Structures
6.1.1Efficiency
6.1.2Perfect Competition
6.1.3Perfect Competition 2
6.1.4Monopolistic Competition
6.1.5Oligopolies
6.1.6The Prisoner's Dilemma
6.1.7Collusion in Oligopolistic Markets
6.1.8A-A* (AO3/4) - Which Factors Affect Collusion?
6.1.9Monopolies
6.1.10Price Discrimination
6.1.11Monopsony
6.1.12A-A* (AO3/4) - Models in Economics
6.1.13Contestability
6.1.14Benefits of Contestability
6.1.15End of Topic Test - Market Structures
6.1.16Application Questions - Market Structures
6.1.17A-A* (AO3/4) - Cereal Collusion
6.2Labour Market
6.2.1Demand for Labour
6.2.2Supply of Labour
6.2.3Labour Market Imperfections
6.2.4A-A* (AO3/4) - Labour Productivity & Unemployment
6.2.5A-A* (AO3/4) - What Level of Unionisation is Good?
6.2.6Wage Determination
6.2.7Elasticity of Labour Supply & Demand
6.2.8Intervention in Setting Wages
6.2.9End of Topic Test - Labour Market
6.2.10A-A* (AO3/4) - Labour Markets
6.3Government Intervention
6.3.1Reasons for Government Intervention
6.3.2Government Promotion of Competition
6.3.3Usefulness of Competition Policy & Examples
6.3.4A-A* (AO3/4) - Modern Competition Policy
6.3.5Privatisation
6.3.6Government Regulation
6.3.7A-A* (AO3/4) - Nationalisation vs Privatisation
6.3.8Government Protection of Suppliers and Employees
6.3.9Impact of Government Intervention
6.3.10End of Topic Test - Government Intervention
6.3.11Application Questions - Government Intervention
7A Global Perspective
7.1International Economics - Globalisation & Trade
7.2International Economics - Currency
7.2.1Merged Currency
7.2.2Restrictions on Free Trade
7.2.3Arguments for Protectionism
7.2.4Arguments Against Protectionism
7.2.5Balance of Payments
7.2.6Balance of Payments 2
7.2.7Floating Exchange Rates
7.2.8Fixed Exchange Rate
7.2.9International Competitiveness
7.2.10End of Topic Test - International Economy
7.2.11Application Questions - International Economics
8Finance & Inequality
8.1Poverty & Inequality
8.2Emerging & Developing Economies
8.2.1Measures of Development
8.2.2Factors Influencing Growth & Development
8.2.3Barriers to Development
8.2.4Barriers to Development 2
8.2.5A-A* (AO3/4) - The Bottom Billion
8.2.6Development Strategies
8.2.7Interventionist Strategies
8.2.8Aid
8.2.9International Institutions
8.2.10International Institutions 2
8.2.11End of Topic Test - Emerging & Developing
8.2.12Application Questions - Developing Countries
8.3The Financial Sector
8.4Role of the State in the Macroeconomy
9Examples of Global Policy
9.1International Policies
Jump to other topics
1Introduction to Markets
1.1Nature of Economics
1.1.1Economics as a Social Science
1.1.2Positive & Normative Economic Statements
1.1.3The Economic Problem
1.1.4Resources
1.1.5Production Possibility Frontiers
1.1.6Specialisation & Division of Labour
1.1.7Types of Economies
1.1.8End of Topic Test - Nature of Economics
1.1.9Application Questions - Nature of Economics
1.2How Markets Work
1.2.1Rational Decision Making
1.2.2Demand
1.2.3Elasticities of Demand
1.2.4Elasticities of Demand 2
1.2.5Elasticity & Revenue
1.2.6Supply
1.2.7Elasticity of Supply
1.2.8Price Determination
1.2.9Price Mechanism
1.2.10Consumer & Producer Surplus
1.2.11Indirect Taxes & Subsidies
1.2.12A-A* (AO3/4) - Taxing Prices or Quantities?
1.2.13Alternative View of Consumer Behaviour
1.2.14End of Topic Test - Markets
1.2.15A-A* (AO3/4) - Markets
2Market Failure
2.1Market Failure
2.2Government Intervention
2.2.1Government Intervention in Markets
2.2.2Subsidies & Price Controls
2.2.3Pollution Permits & Regulation
2.2.4A-A* (AO3/4) - European Emissions Trading
2.2.5State Provision & Information Provision
2.2.6Government Failure
2.2.7End of Topic Test - Government Intervention
2.2.8A-A* (AO3/4) - Government Intervention
3The UK Macroeconomy
3.1Measures of Economic Performance
3.1.1Measuring Economic Growth
3.1.2National Income Data
3.1.3Inflation
3.1.4Causes of Inflation
3.1.5Consequences of Inflation
3.1.6Employment & Unemployment
3.1.7Causes & Impact of Unemployment
3.1.8A-A* (AO3/4) - Hysteresis
3.1.9Balance of Payments
3.1.10Current Account Deficit & Imbalances
3.1.11End of Topic Test - Economic Performance
3.1.12Application Questions Macroeconomy
3.2Aggregate Demand
3.3Aggregate Supply
3.4National Income
4The UK Economy - Policies
4.1Macroeconomic Objectives & Policies
4.1.1Possible Objectives
4.1.2Demand-Side Policies - Monetary
4.1.3Demand-Side Policies - Monetary 2
4.1.4A-A* (AO3/4) - The Future of Interest Rates
4.1.5Demand-Side Policies - Fiscal
4.1.6Demand-Side Policies in 2007-08
4.1.7Strengths & Weaknesses of Demand Side
4.1.8Supply-Side Policies
4.1.9Supply-Side Policies 2
4.1.10Conflicts Between Objectives
4.1.11A-A* (AO3/4) - Conflicting Incentives
4.1.12Phillips Curve
4.1.13End of Topic Topic - Policies & Objectives
4.1.14Application Questions - UK Policies
5Business Behaviour
5.1Business Growth
5.2Business Objectives
6Market Structures
6.1Market Structures
6.1.1Efficiency
6.1.2Perfect Competition
6.1.3Perfect Competition 2
6.1.4Monopolistic Competition
6.1.5Oligopolies
6.1.6The Prisoner's Dilemma
6.1.7Collusion in Oligopolistic Markets
6.1.8A-A* (AO3/4) - Which Factors Affect Collusion?
6.1.9Monopolies
6.1.10Price Discrimination
6.1.11Monopsony
6.1.12A-A* (AO3/4) - Models in Economics
6.1.13Contestability
6.1.14Benefits of Contestability
6.1.15End of Topic Test - Market Structures
6.1.16Application Questions - Market Structures
6.1.17A-A* (AO3/4) - Cereal Collusion
6.2Labour Market
6.2.1Demand for Labour
6.2.2Supply of Labour
6.2.3Labour Market Imperfections
6.2.4A-A* (AO3/4) - Labour Productivity & Unemployment
6.2.5A-A* (AO3/4) - What Level of Unionisation is Good?
6.2.6Wage Determination
6.2.7Elasticity of Labour Supply & Demand
6.2.8Intervention in Setting Wages
6.2.9End of Topic Test - Labour Market
6.2.10A-A* (AO3/4) - Labour Markets
6.3Government Intervention
6.3.1Reasons for Government Intervention
6.3.2Government Promotion of Competition
6.3.3Usefulness of Competition Policy & Examples
6.3.4A-A* (AO3/4) - Modern Competition Policy
6.3.5Privatisation
6.3.6Government Regulation
6.3.7A-A* (AO3/4) - Nationalisation vs Privatisation
6.3.8Government Protection of Suppliers and Employees
6.3.9Impact of Government Intervention
6.3.10End of Topic Test - Government Intervention
6.3.11Application Questions - Government Intervention
7A Global Perspective
7.1International Economics - Globalisation & Trade
7.2International Economics - Currency
7.2.1Merged Currency
7.2.2Restrictions on Free Trade
7.2.3Arguments for Protectionism
7.2.4Arguments Against Protectionism
7.2.5Balance of Payments
7.2.6Balance of Payments 2
7.2.7Floating Exchange Rates
7.2.8Fixed Exchange Rate
7.2.9International Competitiveness
7.2.10End of Topic Test - International Economy
7.2.11Application Questions - International Economics
8Finance & Inequality
8.1Poverty & Inequality
8.2Emerging & Developing Economies
8.2.1Measures of Development
8.2.2Factors Influencing Growth & Development
8.2.3Barriers to Development
8.2.4Barriers to Development 2
8.2.5A-A* (AO3/4) - The Bottom Billion
8.2.6Development Strategies
8.2.7Interventionist Strategies
8.2.8Aid
8.2.9International Institutions
8.2.10International Institutions 2
8.2.11End of Topic Test - Emerging & Developing
8.2.12Application Questions - Developing Countries
8.3The Financial Sector
8.4Role of the State in the Macroeconomy
9Examples of Global Policy
9.1International Policies
Unlock your full potential with GoStudent tutoring
Affordable 1:1 tutoring from the comfort of your home
Tutors are matched to your specific learning needs
30+ school subjects covered