Profit Flashcards
What is accounting profit
TR - TC where TC is the explicit physical costs i.e. fixed + variable
What is economic profit
TR – TC where TC is explicit physical costs + implicit opportunity costs
i.e. accounting profit - implicit costs
What are the implicit costs that are accounted for in economic profit
the cost of not doing the next best alternative e.g. if you have a choice between selling laptops and tablets and you decide to sell laptops, the implicit cost would be the accounting profit that could have been made from producing tablets
What is normal profit
Where a firm has 0 economic profit so this is the minimum level of profit required to keep factors of production in their current use (because if you are making less than that, you would switch to producing the alternative e.g. tablets from the other example)
What is abnormal/supernormal profit
When economic profit is above normal profit so economic profit is positive (firm would keep factors of production in their current use)
What is subnormal profit
When economic profit is below normal profit so the firm is making an economic loss where the profit being made is not enough to cover the opportunity cost of production so they would switch their factors of production to producing the alternative
How can normal profit be shown on a diagram
Where AC = AR
How can abnormal profit be shown on a diagram
Where AR > AC
How can subnormal profit be shown on a diagram
Where AR < AC
