Podcast
Questions and Answers
What is the purpose of a firm's profit in a competitive environment?
What is the purpose of a firm's profit in a competitive environment?
- To provide a measure of efficiency and act as a financial incentive to entrepreneurs (correct)
- To increase production
- To maximize revenue
- To minimize cost
A firm will continue to produce even if the price is less than the average variable cost.
A firm will continue to produce even if the price is less than the average variable cost.
False (B)
What is the goal of a loss-minimizing firm in the short run?
What is the goal of a loss-minimizing firm in the short run?
To produce at the output level where MR=MC, assuming MC cuts the MR line from below.
A firm will shut down temporarily if its price is less than its _______________ cost.
A firm will shut down temporarily if its price is less than its _______________ cost.
What happens to a firm's fixed cost during a shut-down?
What happens to a firm's fixed cost during a shut-down?
In the long run, a perfectly competitive firm can earn abnormal profits.
In the long run, a perfectly competitive firm can earn abnormal profits.
Match the following terms with their definitions:
Match the following terms with their definitions:
What is the role of profit in the economy, according to Joseph Schumpeter?
What is the role of profit in the economy, according to Joseph Schumpeter?
What happens when the firm produces more than Qe?
What happens when the firm produces more than Qe?
The firm makes an abnormal profit when TR = TC
The firm makes an abnormal profit when TR = TC
What is the minimum return of factor inputs referred to as?
What is the minimum return of factor inputs referred to as?
The firm makes an abnormal/supernormal/economic profit if TR > TC, including both __________ and implicit costs.
The firm makes an abnormal/supernormal/economic profit if TR > TC, including both __________ and implicit costs.
Match the following terms with their definitions:
Match the following terms with their definitions:
What is the main assumption made about firms in traditional economics?
What is the main assumption made about firms in traditional economics?
Average revenue is equal to price.
Average revenue is equal to price.
What represents the change in TR resulting from a one-unit change in sales?
What represents the change in TR resulting from a one-unit change in sales?
The output at which profits are maximized or losses are minimized is known as the ______________ output.
The output at which profits are maximized or losses are minimized is known as the ______________ output.
Match the following terms with their definitions:
Match the following terms with their definitions:
A firm will always maximize profit or minimize loss by producing an output level where the positive difference between total revenue and total cost is at its lowest.
A firm will always maximize profit or minimize loss by producing an output level where the positive difference between total revenue and total cost is at its lowest.
What is the excess of total revenue over total costs?
What is the excess of total revenue over total costs?
The profit-maximising or loss-minimising rule assumes that firms seek to minimise profit.
The profit-maximising or loss-minimising rule assumes that firms seek to minimise profit.
What does the marginal revenue (MR) represent?
What does the marginal revenue (MR) represent?
Average revenue (AR) is equal to TR ÷ ______________________.
Average revenue (AR) is equal to TR ÷ ______________________.
Match the following terms with their definitions:
Match the following terms with their definitions:
What is the condition for profit maximization in a firm?
What is the condition for profit maximization in a firm?
If the firm produces more than Qe, the marginal profit is positive.
If the firm produces more than Qe, the marginal profit is positive.
What is the role of opportunity costs in calculating normal profit?
What is the role of opportunity costs in calculating normal profit?
The firm makes a ______________ profit if TR > TC, including both explicit and implicit costs.
The firm makes a ______________ profit if TR > TC, including both explicit and implicit costs.
Match the following terms with their definitions:
Match the following terms with their definitions:
What is the main reason for a firm to continue producing even if it is making a loss?
What is the main reason for a firm to continue producing even if it is making a loss?
What is the consequence of a firm's price being less than its average variable cost?
What is the consequence of a firm's price being less than its average variable cost?
A firm's fixed cost will be eliminated during a shut-down.
A firm's fixed cost will be eliminated during a shut-down.
What is the purpose of profit in the economy, according to the content?
What is the purpose of profit in the economy, according to the content?
If the firm does not expect market conditions to change for the better, it should _______________ out of business.
If the firm does not expect market conditions to change for the better, it should _______________ out of business.
Match the following concepts with their definitions:
Match the following concepts with their definitions:
In the long run, a perfectly competitive firm can earn a normal rate of return.
In the long run, a perfectly competitive firm can earn a normal rate of return.
A firm will produce that output level where MR = MC if price is equal to or greater than _______________ variable cost.
A firm will produce that output level where MR = MC if price is equal to or greater than _______________ variable cost.
Study Notes
Profit-Maximisation and Loss-Minimization
- The traditional assumption is that firms seek to maximize profit, which is the excess of total revenue over total costs.
The Profit-Maximising or Loss-Minimising Rule
- A firm will maximize profit or minimize loss by producing an output level where the positive difference between total revenue and total cost is at its greatest, or where marginal revenue equals marginal cost.
- The output at which profits are maximized or losses are minimized is known as the equilibrium output.
Total Revenue, Average Revenue, and Marginal Revenue
- Total revenue (TR) represents the total receipts generated from selling a specific number of units.
- Average revenue (AR) refers to the revenue earned by unit sold and is equal to TR÷Q.
- Marginal revenue (MR) represents the change in TR resulting from a one-unit change in sales and is equal to ΔTR÷ΔQ.
Equilibrium Output
- At the equilibrium output, the gradients of the TR and TC curves are the same, and MC = MR.
- The distance between TR and TC is at its greatest at the equilibrium output.
Normal Profit and Abnormal Profit
- A normal profit is made when TR = TC, taking into account implicit costs (opportunity costs).
- An abnormal/supernormal/economic profit is made when TR > TC.
- Normal profit is the minimum return of factor inputs and can be regarded as a fixed cost.
Losses and When to Go Out of Business
- A firm making a loss will have to decide what to do, considering its current total revenue relative to its total variable cost and expectations about the future.
- Options include: (1) continuing to operate in the short run, (2) shutting down temporarily, or (3) going out of business.
- If total revenue is greater than total variable cost, it makes sense to continue producing to minimize loss.
- If price is less than average variable cost, a temporary shut-down is preferable to short-run operation.
The Role of Profits
- Profit acts as a financial incentive to entrepreneurs to undertake risks and provides a measure of efficiency.
- Profit enables firms to accumulate sufficient wealth to carry out innovation and acts as a market signal to indicate where resources should be allocated in satisfying consumer preferences.
Profit-Maximisation and Loss-Minimization
- The traditional assumption is that firms seek to maximize profit, which is the excess of total revenue over total costs.
The Profit-Maximising or Loss-Minimising Rule
- A firm will maximize profit or minimize loss by producing an output level where the positive difference between total revenue and total cost is at its greatest, or where marginal revenue equals marginal cost.
- The output at which profits are maximized or losses are minimized is known as the equilibrium output.
Total Revenue, Average Revenue, and Marginal Revenue
- Total revenue (TR) represents the total receipts generated from selling a specific number of units.
- Average revenue (AR) refers to the revenue earned by unit sold and is equal to TR÷Q.
- Marginal revenue (MR) represents the change in TR resulting from a one-unit change in sales and is equal to ΔTR÷ΔQ.
Equilibrium Output
- At the equilibrium output, the gradients of the TR and TC curves are the same, and MC = MR.
- The distance between TR and TC is at its greatest at the equilibrium output.
Normal Profit and Abnormal Profit
- A normal profit is made when TR = TC, taking into account implicit costs (opportunity costs).
- An abnormal/supernormal/economic profit is made when TR > TC.
- Normal profit is the minimum return of factor inputs and can be regarded as a fixed cost.
Losses and When to Go Out of Business
- A firm making a loss will have to decide what to do, considering its current total revenue relative to its total variable cost and expectations about the future.
- Options include: (1) continuing to operate in the short run, (2) shutting down temporarily, or (3) going out of business.
- If total revenue is greater than total variable cost, it makes sense to continue producing to minimize loss.
- If price is less than average variable cost, a temporary shut-down is preferable to short-run operation.
The Role of Profits
- Profit acts as a financial incentive to entrepreneurs to undertake risks and provides a measure of efficiency.
- Profit enables firms to accumulate sufficient wealth to carry out innovation and acts as a market signal to indicate where resources should be allocated in satisfying consumer preferences.
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Description
Understand the concept of profit maximisation and loss minimization, including the profit-maximising rule and the relationship between total revenue and total costs.
