AP Economics Mr. Bernstein Module 52: Defining Profit November 2015

AP Economics Mr. Bernstein Understanding Profit Economists and Accountants differ on the definition of profit Both explicit and implicit costs are used in calculating opportunity costs Explicit costs are moneys actually paid out (ie rent, interest on debt, cost of raw materials, labor, utility bills, depreciation…”Accounting costs”) Implicit costs do not require cash outlay (ie foregone salary, interest or rent when capital or the owner’s time and energy are used elsewhere…included in ”Economic costs”) 2

AP Economics Mr. Bernstein Defining Profit Profit = TR – TC TR = P x Q (precise definition of TC will be covered in Module 55) Economists use  to represent profit But Economists include both explicit and implicit costs in determining economic profit… 3

AP Economics Mr. Bernstein Normal Profit Economic Profit = zero is said to be “Normal Profit” = TR - all opportunity costs (explicit AND implicit costs) When a firm is earning a normal profit, it can do no better using resources in the next best alternative use …so zero Economic Profit is not so bad! 4