EconomicsNotes

  Profit is a positive difference between revenue and cost. Firms maximise profit where they neither make nor lose money on the last item produced and sold. This is the level of production where marginal cost is equal to marginal revenue. The actual amount of profit in such circumstances will be defined by the difference between average cost and average revenue at that level of production.   Economics also makes a distinction between normal, break-even, and abnormal (sometimes called supernormal) profits. Normal profit is the level of profit at which a firm covers its opportunity cost, usually defined as what it could have earned by doing something else with its money in the same time period. Break-even is an accounting concept in which a firm’s revenues are equal to its costs and is usually treated as the same thing as normal profit by economists. Abnormal profit is what most people understand as profit, which is a surplus of cash over spending. Economic theory does not a...

  A firm’s costs are made up of fixed and variable costs. Fixed costs do not change with output, and therefore fall when averaged. Variable costs do change with output, and will eventually always increase because of rising marginal costs, which in turn cause returns to diminish with each extra item of output before becoming negative.   The lowest point of each short-run average cost curve forms a point on the long-run average cost curve (the short run being the period when at least one factor of production is fixed and the long run being that when all factors can be varied.) It follows that there will be a point on the Long-run average cost curve when a firm reaches its lowest LRAC, and that the LRAC will have been falling as each successive SRAC falls ‘downwards’ along it.  The explanation for why this process occurs is not linked to any one cause, and could involve falls in wage, raw material, regulatory, or business costs.  They could also be the result of econo...