Profit Concepts Defined
- Levels: A Level
- Exam boards: AQA, Edexcel, OCR, IB, Other, Pre-U
A set of key definitions centred around the concept of profit
Profit in excess of normal profit - also known as supernormal profit or monopoly profit. Abnormal profits may be maintained in a monopolistic market in the long run because of barriers to entry
The break-even price is when price = average total cost (P=AC)
A cross subsidy uses profits from one line of business to finance losses in another line of business e.g. Royal Mail and 2nd class letters
The increase in profit when one more unit is sold or the difference between MR and MC. If MR = £20 and MC = £14 then marginal profit = £6
A firm is said to reap monopoly profits when a lack of viable market competition allows it to set its prices above the equilibrium price for a good or service without losing profits to competitors
Normal profit is the transfer earnings of the entrepreneur i.e. the minimum reward necessary to keep her in her present industry. The activities of the entrepreneur are independent of the level of output. Normal profit is therefore a fixed cost, included in the average, not the marginal, cost curve
The excess of revenue over expenses; or a positive return on an investment.
The ratio of profit over revenue, expressed as a percentage. Mainly an indication of the ability of a company to control costs
Profit maximization occurs when marginal cost = marginal revenue
Profit per unit
Profit per unit (or the profit margin) = AR – ATC. In markets where demand is price inelastic, a business may be able to raise price well above average cost earning a higher profit margin on each unit sold. In more competitive markets, profit margins will be lower because demand is price elastic
Any profit less than normal profit – where price < average cost
A firm earns supernormal profit when its profit is above that required to keep its resources in their present use in the long run i.e. when price > average cost
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