Presentation is loading. Please wait.

Presentation is loading. Please wait.

Defining Profit.

Similar presentations


Presentation on theme: "Defining Profit."— Presentation transcript:

1 Defining Profit

2 Primary goal of most firms is to maximize profit
A firms profit equals its total revenue So profit equals total revenue- total costs (is the cost of all inputs used to produce its output) PxQ-total cost= profit

3 Explicit vs. Implicit cost
Explicit cost The cost that involves actually laying out money Ex. The explicit cost of a year of college includes tuition Implicit cost It does not require an outlay of money; it is measured by the value, in dollar terms, of benefits that are foregone. Ex. The implicit cost of a year of college includes the income you would have earned if you had taken a job instead

4 A common mistake is to ignore implicit cost and focus on explicit cost
Sometimes implicit cost is much larger than explicit cost

5 Accounting profit vs. Economic profit
Is a business’s total revenue minus the explicit cost and depreciation This is the number a business must report on income tax forms and to anyone thinking of investing in a business

6 Economic profit It is a business’s total revenue minus the opportunity cost of its resources. It is usually less than accounting profit Economists use term profit to refer to economic profit

7 A business may have an implicit cost that is over and above the explicit cost
Two reason for this A business’s capital (i.e. buildings, equipment, tools, inventory, and financial assets) could have been put to use in some other way. The owner devotes time and energy to the business that could have been used elsewhere

8 Implicit cost of capital
It is the opportunity cost of the capital used by a business; it reflects the income that could have been earned if the capital had been used in its next best alternative way.

9 When a business owner is earning an economic profit their total revenue is higher than the sum of implicit and explicit cost

10 When an economic profit equals zero it is called normal profit
Positive economic profit indicates that the current use is the best use of resources Negative economic profit indicates that there is a better alternative use for resources When an economic profit equals zero it is called normal profit It is an economic profit just high enough to keep a firm engaged in its current activity


Download ppt "Defining Profit."

Similar presentations


Ads by Google