key term - Long-Run Profits

Definition

Long-run profits refer to the potential for a firm to earn profits over an extended period of time, where the firm has the flexibility to adjust all of its inputs, including capital investments. This concept is closely tied to the ideas of explicit and implicit costs, as well as accounting and economic profit.

5 Must Know Facts For Your Next Test

1. In the long run, a firm can adjust all of its inputs, including capital investments, which allows it to potentially earn higher profits than in the short run.
2. Explicit costs, such as wages and rent, are included in the calculation of accounting profit, while implicit costs, like the opportunity cost of the owner's time, are not.
3. Economic profit takes into account both explicit and implicit costs, providing a more comprehensive view of a firm's profitability.
4. Firms that are able to earn long-run profits are often those that have a competitive advantage, such as a unique product, lower costs, or superior technology.
5. The concept of long-run profits is crucial for understanding a firm's decision-making process, as it helps to identify the potential for sustainable profitability.

Review Questions

• Explain how the concept of long-run profits is related to the distinction between explicit and implicit costs.
  • In the long run, a firm can adjust all of its inputs, including capital investments, which allows it to potentially earn higher profits than in the short run. Explicit costs, such as wages and rent, are included in the calculation of accounting profit, while implicit costs, like the opportunity cost of the owner's time, are not. By taking into account both explicit and implicit costs, the concept of economic profit provides a more comprehensive view of a firm's profitability in the long run, as it captures the true cost of all resources used in production, including the firm's own resources.
• Describe how the concept of long-run profits is connected to a firm's ability to earn sustainable profits.
  • Firms that are able to earn long-run profits are often those that have a competitive advantage, such as a unique product, lower costs, or superior technology. This allows them to generate profits over an extended period of time, as they have the flexibility to adjust all of their inputs, including capital investments, to maintain their competitive edge. The concept of long-run profits is crucial for understanding a firm's decision-making process, as it helps to identify the potential for sustainable profitability, which is essential for a firm's long-term success and growth.
• Analyze how the distinction between accounting profit and economic profit relates to the concept of long-run profits.
  • The distinction between accounting profit and economic profit is central to the concept of long-run profits. Accounting profit only considers a firm's explicit costs, while economic profit takes into account both explicit and implicit costs. In the long run, a firm's ability to earn profits is determined by its ability to cover all of its costs, including the opportunity cost of using its own resources. By considering both explicit and implicit costs, the concept of economic profit provides a more accurate representation of a firm's true profitability, which is essential for understanding its potential to earn sustainable, long-run profits. This, in turn, informs the firm's decision-making process and strategic planning for the future.

Related terms

Explicit Costs:

The actual, out-of-pocket expenses a firm incurs in the production of goods or services, such as wages, rent, and raw materials.

Implicit Costs:

The opportunity costs of using a firm's own resources, such as the value of the owner's time or the use of the firm's own capital equipment.

Accounting Profit:

The difference between a firm's total revenue and its explicit costs, as reported on the firm's financial statements.