Profit

Profit is the difference between revenue and costs.

Maximizing Profit Profit maximization occurs at .

Before Q*, so producing more output will increase total profit. At Q* profits are maximized. After Q*, so producing more output will decrease total profit.

Profit is maximized at because the difference between TR and TC is maximized.

All three diagrams related to profit maximization in detail are shown on the next page.

Zero or Normal Profit An accountant would calculate cost as just the ‘monetary’ cost of machinery, wages, bills, rent etc. An economist includes into costs the opportunity cost of production. This is the profit that could have been made had the resources been employed in their next best use. This opportunity cost is normal profit.

Normal profit is thus the minimum level of profit required to keep a firm’s resources in their current use in the long-run. If a firm makes normal profit then it will stay in the industry in the long-run. If a firm makes less than normal profit then it makes a loss so it will shut-down in the long-run and put its resources to a better use.

A firm makes normal profit if . Because , normal profit is also called Zero profit. Zero or normal profit means the firm earns enough revenue to cover the ‘monetary’ cost of resources (bills, wages, rent etc.) and their opportunity cost (normal profit).

Super-Normal Profit Super-normal profit (or abnormal profit) is earned when . Super-normal profit is profit greater than normal profit. Revenue exceeds both the ‘monetary’ costs and opportunity cost of resources.