Topics : Accounting profit Average revenue Marginal revenue di Augusta Delle Vedove

interact there are many objective

An accounting profit is the excess of business income over the business expenses. The accounting profit is measured as the firm's total revenue minus only the firms explicit costs. Accounting Profit = Total Revenue - Explicit Costs The economic profit is the total revenue minus all the opportunity costs ( explicit and implicit ) of producing the goods and services sold. Economic Profit = Total Revenue - ( Explicit costs + Implicit Costs )

Economic profit is smaller than accounting profit

Let’s see an example We are the owner of a t-shirts shop. At the end of the first year of working we analyse the financial situation of our shop. As we can see we're losing money because the economic profit, which is the complete computation, is negative.

To better understand why we aren't earning money we can consider the Average Revenue and the Marginal Revenue. The average revenue is the total revenue divided by the quantity. As we can see the average revenue is equal to the price of the good. This happens not only in our example, but in each firms. Average Revenue = Total Revenue / Quantity = Price x Quantity / quantity = Price Average Revenue = Total Revenue / Quantity

The average revenue in our example

The marginal revenue is the change in total revenue from the sale of each additional unit of output. As the average revenue also the marginal revenue is equal to the price. This happens only in competitive market because the price is fixed. So when the quantity rises by one unit, the total revenue rises by P euro, which is fixed. ∆TR Marginal Revenue = ∆Q

The marginal revenue in our example