Intro to Profits

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Intro to Profits
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Return of HWK

• Posters.
• Key issue is of FC NOT linked to output!
• Some examples still had FC items as VC! Check
  notes on your work.

• MC Qs
• See next slide

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Explanation AC MC 8000 7980 6000 7970 7000
C
Answer
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Explanation AVC VC/output TC FC VC VC
TC-FC (15000 10000)/5000 1
E
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Intro to Profits
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Aims

• To understand the different types of profit.

Tesco Profits
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But 1stcan you remember the diagram.?

• Quick test.draw a business cost diagram to show
• MC
• AVC
• ATC
• AFC
• Label the point where diminishing returns set in.
• Label the most productively efficient output
  level.

This diagram is central to this unit of
work!!! You need to be able to have the labels
correctly labeled and in the right order!
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Draw this in your notes!
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Perspectives on profit

• What is a man if he is not a thief who openly
  charges as much as he can for the goods he
  sells?
• Gandhi
• Civilization and profits go hand in hand
• Calvin Coolidge (30th US president)

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What is profit?
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Accounting Profits

• Is the difference between revenue and costs.
• A firm will maximise profits where the difference
  between TR TC is greatest.

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The profit maximising level of output
Another diagram to learn!
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A numeric example

• Calculate the total profit at each level of
  output.
• What is the profit maximising level of output?
• Calculate the MR MC of production at each level
  of output.
• Write a sentence to explain why MC MR at the
  profit maximising level of output.

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Create the graph

• Use graph paper
• Using the previous data
• Create TWO graphs directly underneath each other!
  Use the same scale for output on both
• Top shows TR TC
• Underneath shows MR MC
• Mark on each the breakeven level of output
• The profit maximising level of output.

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Different types of profit!
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Different types of profit

• Profit measures the return to risk when
  committing scarce resources to a market or
  industry
• In economics there are 3 different types of
  profit
• Normal profit
• Sub-normal profit
• Abnormal profit

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Normal Profits

• Normal profit - is the minimum level of profit
  required to keep the factors of production in
  their current use in the long run
• Normal profits reflect the opportunity cost of
  using funds to finance a business
• If you wanted to start up your own business and
  put 50,000 of your own money into its start up,
  then you would look at how much 50k would earn
  you in a fairly risk-free way in a bank or
  building society deposit account. You could look
  at the interest youd earn on that 50k as the
  minimum rate of return that you need to make from
  your business investment in order to keep going
  in the long run!
• So your normal profit must cover this
  opportunity cost of you running this business!

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Sub-normal Profits

• Because we treat normal profit as an opportunity
  cost of investing financial capital in a
  business, we normally include an estimate for
  normal profit in the average total cost curve,
  thus, if the firm covers its ATC (where AR meets
  AC) then it is making normal profits.
• Sub-normal profit - is any profit less than
  normal profit (where price lt average total cost)
• So in our example, if you invested 50k and could
  get 1 IR. Your normal profit would have to be
  500 so if you only earned 200 profit . Its
  profit but sub-normal!

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Shut down level

• What would you do if your company earned
  subnormal profits?
• Too much sub-normal profits will mean that the
  business will have to shut down in the long run!

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Sub-normal profits in mortgage industry

• Many financial institutions are leaving the FIXED
  rate mortgage market as they are experiencing
  sub-normal profits. And the effect on the
  economy is?

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Super-normal Profits

• Super normal or Abnormal profit - is any profit
  achieved in excess of normal profit - also known
  as supernormal profit
• So in our example, if your business earned 3000
  profit this year. Its super normal

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Profit maximisation

• MR MC

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• Need to look at allocative efficiency
• But in this lesson?

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Other ideas???

• http//tutor2u.net/blog/index.php/economics/tagged
  /tag/shutdownprice/
• Shut down links at end of pdf
• http//www.tutor2u.net/blog/files/Revision_Shut_Do
  wn_Price.pdf

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• http//www.tutor2u.net/blog/index.php/business-stu
  dies/comments/video-case-study-sony-suffers-a-1bil
  lion-loss/extended
• Sony loss dvd 1 ½ min

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Look at these figuresfill in the gaps
MR-MC
Another exercise.leave for HWK?
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The answers.
Uses concept of contribution
Whats the optimal output?
So now youve got to plot the TC TR and the MR
MC data. It can be on the same chart
Break even TR TC Survival
Which is best . Sell 6 or 7 units?
It depends on business objectives!
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Plot the data onto a chart it would look
something like this
Maximum profit area
MR MC
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HWK

• Find a business news article about a company
  recording profits or losses analyse the key
  issues
• Eg Tesco, Sony, Google etc
• Use BBC, Guardian or other online newspaper
  search engine