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Pooja Singh

This document discusses the differences between economic profit and accounting profit. Economic profit is total revenue minus all costs, including opportunity costs, while accounting profit only considers explicit costs. The difference between economic and accounting costs is normal profit, which represents the opportunity cost of owner-supplied resources. For a firm to maximize profits, economic profit must be greater than zero so the firm's owners earn more than their next best alternative use of resources. If economic profit is zero, the firm earns only a normal profit and there is no incentive to enter or leave the industry. If economic profit is negative, owners earn less than alternatives and firms will eventually leave the industry.

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460 views10 pages

Pooja Singh

This document discusses the differences between economic profit and accounting profit. Economic profit is total revenue minus all costs, including opportunity costs, while accounting profit only considers explicit costs. The difference between economic and accounting costs is normal profit, which represents the opportunity cost of owner-supplied resources. For a firm to maximize profits, economic profit must be greater than zero so the firm's owners earn more than their next best alternative use of resources. If economic profit is zero, the firm earns only a normal profit and there is no incentive to enter or leave the industry. If economic profit is negative, owners earn less than alternatives and firms will eventually leave the industry.

Uploaded by

Pooja Singh
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
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Presentation on Profit

Profit maximization

Economic profit = total revenue - all economic costs Economic costs include all opportunity costs (explicit and implicit).

Economic vs. accounting profit

economic profit = total revenue - all economic costs accounting profit = total revenue - all accounting costs accounting costs include only current or historical explicit costs, not implicit costs

Economic vs. accounting profit

the difference between between economic cost and accounting cost is the opportunity cost of resources supplied by the firm's owner. the opportunity cost of these ownersupplied resources is called normal profit.

normal profit is a cost of production.

Economic vs. accounting profit

If the owners of a firm economic profits, they are receiving a rate of return on the use of their resources that exceeds that which can be received in their next-best use. In this situation, we'd expect to see other firms entering the industry (unless barriers to entry exist).

Economic vs. accounting profit

If a firm is receiving economic losses (negative economic profits), the owners are receiving less income than could be received if their resources were employed in an alternative use. In the long run, we'd expect to see firms leave the industry when this occurs.

Economic profits = 0

If economic profits equal zero, then:

owners receive a payment equal to their opportunity costs (what could be received in their next-best alternative), no incentive for firms to either enter or leave this industry, accounting profit = normal profit.

Economic profit

Economic profit = total revenue - economic costs when output rises, both total revenue and total costs increase (with a few exceptions that will be discussed in later chapters) profits increase when output increases if total revenue rises by more than total costs.

profits decrease when output rises if total costs rise by more than total revenue

Profit maximization
Profit = (profit per unit) x # of units = (P ATC) x Q

Profit maximization

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