Types of Profit
Two Types of Profit
Profits provides the incentive for firms to innovate, cut costs and generally engage in behavior that uses society's resources efficiently.
Accounting Profit Formulas
Total Revenue= Price x Quantity
Total Cost=Fixed Costs + Variable Costs
Accounting Profit = Total Revenue - Explicit Costs
TR - Explicit and Implicit Costs = Profit
$120,000-$90,000-$30,000= $0
Economic Profit
Calculating Marginal Revenue and Costs
marginal revenue= change in total revenue/ change in quantity
marginal cost = change in total cost/change in quantity
Assume a competitive firm is producing where its price(P) and marginal revenue (MR) are greater than its marginal cost. What can be said regarding the firm's short-run output level?
The firm is producing too little and should increase its output level until P=MR=MC
Explicit Costs
"out of pocket expenses"
money spent on materials, utilities, labor, rent, capital, etc.
Economic Profit Formulas
Total Revenue= Price x Quantity
Total Cost= Explicit Costs + Implicit Costs
Economic Profit= Total Revenue - Explicit Costs and implicit costs
Normal Profit
business, expenses (land, labor and capital)
If TR>TC...
the firm earns an economic profit
Assume a competitive firm is experiencing the following costs at a quantity of 10 and for $8. What should the firm do to maximize profits?
MR=$8, MC=$4, TR=$80, TC=$60
The firm should produce more than a quantity of 10 to maximize its profit.
Implicit Costs
The money value of one's opportunity cost
ex:) Carl's Tasty Barbecue - Accounting Profit
Price of meals x the quantity of meals sold = $120,000
Total Revenue
Profit Determination
that as long as total revenue is greater than Total Cost, firms are earning a profit.
rational firms use Marginal Analysis, profit maximization, marginal analysis is cost-benefit analysis
If TR=TC...
the firm breaks even; earns a normal profit.
MR=MC, graphically speaking...
If MR>MC, the firm should produce more.
If MR=MC, the firm maximizes profit
If MR=MC, the firm should produce less.
A car company faces explicit costs such as metal, copper, rubber, leather, computer software and auto works. Is an example of what?
Explicit Costs
ex:) Carl's Tasty Barbecue - Accounting Profit
Food, wood, spices, electricity, labor = $90,000
Total Explicit Costs
Profit Maximization Rule
MR=MC
If TR<TC...
the firm earns an economic loss
At the quantity that the firm is selling, the firm has Marginal Cost of $200 while Marginal Revenue is $175.
The firm's profits would increase if the firm decreased the quantity sold.
Teacher opens a restaurant: The income they are giving up by becoming a restaurant owner. This is an example of what?
Implicit Costs
ex:) Carl's Tasty Barbecue - Accounting Profit
TR - Explicit Costs = Profit
$120,000 - $90,000 = $30,000
Accounting Profit
Profit Maximization
In order to maximize profit, firms will continue to produce as long as the marginal revenue earned from an additional product is greater than or equal to the marginal cost of that additional product.
MR=MC is the Profit Maximizing Rule
If MR>MC, then the firm should produce more output
If MR<MC, then the firm should produce less output.
Firms Maximize profit at the quantity where MR=MC
As long as the MR curve or line is greater than the MC curve, firms should continue to produce more output.
Firms should produce where the MR curve intersects the MC curve
If a firm is producing where the MC curve is greater than the MR curve, it should reduce its output