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?
Answer
Her accounting profit is $50,000 and her economic profit is $0. She made a normal profit.
Explanation
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.
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💸 Unit 1: Basic Economic Concepts
1.0Unit 1: Basic Economic Concepts
📈 Unit 2: Supply and Demand
⚙️ Unit 3: Production, Cost, and the Perfect Competition Model
3.7Perfect Competition
📊 Unit 4: Imperfect Competition
💰 Unit 5: Factor Markets
🏛 Unit 6: Market Failure and Role of Government
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