Types of Profit - AP Microeconomics

1. How does positive economic profit affect industry supply?

   Increases industry supply. New entrants increase production as they seek above-normal returns.

2. State the condition for a firm to remain in business in the long run.

   Economic Profit ≥ 0. Must cover opportunity costs to justify staying in the industry.

3. What is the implication of zero economic profit for resource allocation?

   Resources are efficiently allocated. Firms earn exactly what resources could earn elsewhere.

4. What is the effect of achieving only normal profit in a perfectly competitive market?

   No new entry or exit. Market is in equilibrium with no incentive for change.

5. What happens to economic profit if implicit costs exceed accounting profit?

   Economic Profit becomes negative. Opportunity costs exceed what the firm actually earns above explicit costs.

6. What type of profit is used to evaluate firm performance over time?

   Economic Profit. Better measures true performance by including opportunity costs.

7. Identify the term: Profit excluding implicit costs.

   Accounting Profit. Only considers actual monetary expenses paid out.

8. Calculate economic profit: Total Revenue = $750, Explicit Costs = $500, Implicit Costs = $300.

   Economic Profit = -$50. $750 - $500 - $300 = -$50$.

9. Identify the term: Profit including opportunity costs.

   Economic Profit. Considers what could be earned in best alternative use of resources.

10. What is the formula for economic profit if implicit costs are zero?

    Economic Profit = Accounting Profit. When no opportunity costs exist, both profit measures are identical.

11. Is normal profit a cost? If yes, what type?

    Yes, it is an implicit cost. Normal profit compensates for opportunity cost of resources used.

12. What does it mean if a firm is covering both explicit and implicit costs?

    Earning Normal Profit. Firm earns exactly enough to justify staying in business.

13. What is the formula for calculating accounting profit?

    Accounting Profit = Total Revenue - Explicit Costs. Subtracts only out-of-pocket expenses from revenue.

14. What type of profit is considered when analyzing market entry or exit?

    Economic Profit. Determines whether firms should enter, stay, or exit the market.

15. What does a zero economic profit suggest about a firm's competitive position?

    Firm is at breakeven point. Earning exactly enough to justify staying without attracting new entrants.

16. Identify: Profit necessary to keep a firm in its current industry.

    Normal Profit. Minimum return required to prevent exit from the industry.

17. What type of profit is a better indicator of true profitability?

    Economic Profit. Includes opportunity costs for more accurate performance measurement.

18. Determine accounting profit: Total Revenue = $800, Explicit Costs = $500.

    Accounting Profit = $300. $800 - $500 = $300$.

19. If a firm has zero economic profit, what type of profit is it earning?

    Normal Profit. Zero economic profit means the firm earns exactly its opportunity cost.

20. Calculate accounting profit: Total Revenue = $600$, Explicit Costs = $450$.

    Accounting Profit = 150. $600 - 450 = 150$

21. Which type of profit occurs when total revenue equals total costs?

    Normal Profit. Occurs at long-run equilibrium where firms earn just enough to stay.

22. Calculate economic profit: Total Revenue = $1000, Explicit Costs = $700, Implicit Costs = $200.

    Economic Profit = $100. $1000 - $700 - $200 = $100$.

23. If a firm earns more than normal profit, what is the economic profit?

    Positive Economic Profit. Earning above normal profit means positive economic profit.

24. What is the impact of positive economic profit on market entry?

    Encourages new firms to enter. Above-normal returns attract new competitors to the market.

25. State the profit type: Zero when total revenue equals total opportunity costs.

    Normal Profit. Equals zero when firm covers all opportunity costs exactly.

26. If implicit costs increase, what happens to economic profit?

    Economic Profit decreases. Higher opportunity costs reduce the economic profit earned.

27. What is the formula for calculating economic profit?

    Economic Profit = Total Revenue - (Explicit + Implicit Costs). Subtracts both out-of-pocket and opportunity costs from revenue.

28. What is the formula for normal profit?

    Normal Profit = Implicit Costs. Represents minimum return needed to keep resources in current use.

29. If total costs exceed total revenue, what type of profit is this?

    Negative Economic Profit. Firm loses money and cannot cover all opportunity costs.

30. What is the role of economic profit in competitive market equilibrium?

    Signal for entry or exit. Positive signals entry; negative signals exit; zero maintains equilibrium.

31. Identify the profit type: Includes only explicit costs.

    Accounting Profit. Considers only actual cash expenses without opportunity costs.

32. Identify the term: Minimum profit needed to sustain a firm's operations.

    Normal Profit. Compensates owners for opportunity cost of their resources.

33. What does a negative economic profit indicate about a firm's opportunity costs?

    Opportunity costs exceed accounting profit. Resources could earn more in their best alternative use.

34. Calculate economic profit: Total Revenue = $500, Explicit Costs = $300, Implicit Costs = $150.

    Economic Profit = $50. $500 - $300 - $150 = $50$.

35. What is the difference between accounting and economic profit?

    Inclusion of implicit costs in economic profit. Economic profit accounts for opportunity costs while accounting profit ignores them.

36. Is it possible to have a positive accounting profit and a negative economic profit?

    Yes. High implicit costs can make economic profit negative despite positive accounting profit.

37. Does positive accounting profit guarantee positive economic profit?

    No. High implicit costs can eliminate economic profit despite accounting profit.

38. What does a positive accounting profit with zero economic profit indicate?

    Covers all costs including opportunity costs. Firm earns enough to cover opportunity costs but no excess.

39. What is the impact of sustained negative economic profit on a firm?

    Potential Exit from Market. Cannot cover opportunity costs so should consider leaving the market.

40. Calculate accounting profit: Total Revenue = $600, Explicit Costs = $450.

    Accounting Profit = $150. $600 - $450 = $150$.

Study these flashcards