Normal profit, supernormal profit and losses

Overview

Recall questions on the profit-maximising condition, why normal profit is treated as a cost, and how each outcome is identified on a diagram.

What you need to know

Answer each one before you reveal it.

Questions from this subtopic

Each one with the model answer underneath.

1. 1

   What is the condition for profit maximisation in terms of marginal cost and marginal revenue?

   Model answer

   Profit maximisation occurs where marginal cost equals marginal revenue (MC = MR).

2. 2

   At the profit-maximising output level, how must the MC curve intersect the MR curve?

   Model answer

   The MC curve must cut the MR curve from below.

3. 3

   Why must the MC curve cut the MR curve from below at the profit-maximising output?

   Model answer

   If MC cuts MR from above, the firm would be at a loss-maximising point rather than a profit-maximising point; cutting from below ensures that producing one more unit would add more to costs than to revenue.

4. 4

   Define normal profit.

   Model answer

   Normal profit is the minimum return required to keep factors of production in their current use.

5. 5

   How is normal profit treated in a firm's accounts from an economist's perspective?

   Model answer

   Normal profit is included as part of a firm's costs of production.

6. 6

   Why is normal profit considered a cost of production rather than actual profit?

   Model answer

   Because it represents the opportunity cost of the entrepreneur's resources and must be covered to prevent factors of production from being transferred to alternative uses.

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