Summary
In economics, profit is calculated by subtracting total costs from total revenue. Normal profit is the minimum profit needed to keep resources in their current use, while supernormal profit exceeds this amount. Marginal cost is the cost of producing one more unit, and marginal revenue is the revenue from selling one more unit. Example: A firm earns normal profit when total revenue equals total cost, but supernormal profit when total revenue surpasses total cost.
Exam Tips
Key Definitions to Remember
- Profit: Total revenue minus total cost
- Normal Profit: Minimum profit to keep resources in use
- Supernormal Profit: Profit exceeding normal profit
- Marginal Cost: Cost of producing one more unit
- Marginal Revenue: Revenue from selling one more unit
Common Confusions
- Confusing normal profit with zero profit
- Misunderstanding the MC = MR rule as always indicating profit maximization
Typical Exam Questions
- What is normal profit? Normal profit is the opportunity cost of resources used in production.
- How is supernormal profit achieved? When total revenue exceeds total cost.
- What happens at the shutdown point? The firm ceases production if total revenue cannot cover total variable costs.
What Examiners Usually Test
- Understanding of profit maximization using MC = MR
- Differences between normal and supernormal profit
- Identification of shutdown points in short and long run