⏱️ November 11, 2020
In economics, a variety of types of profits can occur. A lot of the categorization is geared around what type of costs are being considered in each situation. Profit, in general, is when your total revenue is greater than your total costs. There are a few types of profit you need to know
Another type of profit we look at in economics is called an economic profit. Economic profit is a firm's accounting profit minus its implicit costs (opportunity costs). Let's look at a graphic designer who works for a huge firm and makes $60,000 per year. They decide to quit that job and open their own T-shirt printing business. Let's say in the first year, they sell 100,000 T-shirts at $10 apiece. That means this company earns a revenue of $1,000,000.
In some situations, if revenue is less than costs we can experience what we refer to as economic losses. For example, if the total revenue is $80 and the total cost is $97, we have an economic loss of $17.
When a firm is experiencing an economic profit, they can increase their production. If a firm is earning an economic loss, they will most likely respond by decreasing their output.
Ginny quits a job at a book publishing firm that is paying her $50,000 per year and decides to open a small book store. She decides to house the book store in a small storefront that she rented out for $15,000 a year, and spends $10,000 on bookshelves, books, and other resources. During the first year that the book store is open, Ginny generates $75,000 in total sales. What would be her accounting profit and economic profit? Did she make a normal profit that year?
Her accounting profit is $50,000 and her economic profit is $0. She made a normal profit.
Ginny's accounting profit would be $50,000 due to the $75,000 in total sales minus $25,000 in explicit costs. Her economic profit would be her accounting profit minus her implicit costs, which are the forgone wages she gave up by deciding to open a bookstore ($50,000 - $50,000 = $0). She is making a normal profit because her economic profit is $0.
💸 Unit 1: Basic Economic Concepts
1.0Unit 1: Basic Economic Concepts
1.1Basic Economic Concepts: Scarcity
1.2Resource Allocation and Economic Systems
1.3Production Possibilities Curve (PPC)
📈 Unit 2: Supply and Demand
2.4Price Elasticity of Supply
2.6Market Equilibrium and Consumer and Producer Surplus
2.7Market Disequilibrium and Changes in Equilibrium
2.8The Effects of Government Intervention in Markets
⚙️ Unit 3: Production, Cost, and the Perfect Competition Model
3.6Firms' Short-Run Decisions to Produce and Long-Run Decisions to Enter or Exit a Market
📊 Unit 4: Imperfect Competition
4.1Introduction to Imperfectly Competitive Markets
💰 Unit 5: Factor Markets
5.2Changes in Factor Demand and Factor Supply
5.3Profit-Maximizing Behavior in Perfectly Competitive Factor Markets
🏛 Unit 6: Market Failure and Role of Government
6.1Socially Efficient and Inefficient Market Outcomes
6.3Public and Private Goods
6.4The Effects of Government Intervention in Different Market Structures
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