Profit Maximisation

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Economic theory assumes that all firms intent to
Maximise Profit
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When does profit maximisation occur
When MC=MR
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If MR>MC
Total profit rises
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If MR
Total profit falls
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Normal Profit
Occurs when TR=TC, This is breakeven point for a firm
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Supernormal Profit
Occurs when TR>TC
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Accounting Profit
Revenue-total cost=total profit
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Marginal Revenue
The addition to total revenue from producing and selling one more unit
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Marginal Cost
The addition to total cost from producing and selling one more unit
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ON graph- explain- before PM
Before PM point, MR>MC so producing extra is profitable but you are making less on each unit but still adding to total profit
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ON graph- explain- after PM
After PM point MC>MR, you are making a loss from producing any more unit- therefore produce where MC=MR
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Define- Accounting Profit
Actual, physical amount of money left over from revenue once all physical costs have been subtracted (Total revenue- Total Cost=Accounting Profit)
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Define- Economic Profit
Measures the amount of money left over from revenue oncw subtracted full economic costs including both accounting cost and opportunity cost (Economic Profit= Total revenue-economic Cost)
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Define- Normal Profit
Where economic profit is zero, revenue covers all accounting cost and just covers opportunity cost. TR=TC THIS IS NOT A BREAKEVEN- you HAVE made profitbut op cost is included as a cost of production
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Define- Supernormal Profit
When economic profit is positive this means revenue covers all costs of production (inc. op cost) and there is still some left over. TR>TC
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Define- Subnormal Profit (Economic Loss)
When economic profit is negative, revenue doesn't cover accounting and opportunity costs. Although accounting profit may have been made it is less than the next best option. TC>TR
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What does profit do? (4 things)
1. Provides shareholders with dividends, increase demand for shares and value of them
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What does profit do?
2. Measure of return to risk (reward) for businesses
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What does profit do?
3.Retained for investment in future
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What does profit do?
4. Acts as a signal for market entry, when SNP's are earnt, firms join industry, loss is made, firms exit
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How to increase profit- Increase revenue
1. expand product range 2. Increase price if inelastic 3. decrease price if elastic
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How to increase profit- Decrease Cost
1. Cheaper supplier 2. More efficient machinery
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Other cards in this set

Card 2

Front

When does profit maximisation occur

Back

When MC=MR

Card 3

Front

If MR>MC

Back

Preview of the front of card 3

Card 4

Front

If MR

Back

Preview of the front of card 4

Card 5

Front

Normal Profit

Back

Preview of the front of card 5
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