Normal Profit, Supernormal Profit & Losses
- When calculating costs, Economists consider both the explicit and implicit costs of production
- Explicit costs are the costs which have to be paid e.g raw materials, wages etc.
- Implicit costs are the opportunity costs of production
- This is the cost of the next best alternative to employing the firm's resources
- E.g. if an investor puts £1m into producing bicycles & they could have put it in the bank to receive 5% interest, then the 5% represents an implicit cost
- Implicit costs must be considered, as entrepreneurs will rationally reallocate resources when greater profits can be made elsewhere
- Profit = total revenue (TR) - total costs (TC)
- Total costs include explicit and implicit costs
- Total costs include explicit and implicit costs
- Normal profit occurs when TR = TC
- This is also called breakeven
- This is also called breakeven
- Abnormal (supernormal) profit occurs when TR > TC
- A loss occurs when TR < TC
Profit Calculations
Output | TR (£) | TC (£) | Profit (TR - TC) |
5 | 150 | 70 | 80 |
6 | 180 | 96 | 84 |
7 | 210 | 210 | 0 |
8 | 240 | 260 | -20 |
Observations
- Supernormal profit occurs up to the 6th unit of output
- Normal profits occur at the 7th unit
- From the 8th unit, the firm is making a loss