Flashcards for:
Understanding Profit Types and Maximization

Economic Profit = Accounting Profit - Implicit Costs

Economic Profit = Accounting Profit - Implicit Costs = $40,000 - $35,000 = $5,000

Marginal Revenue (MR) is the change in total revenue divided by the change in quantity sold.

When total cost exceeds total revenue, the firm incurs economic losses.

The profit maximizing rule MR = MC is applicable to both perfect competition and monopolies, as it helps determine the quantity at which profit is maximized by equating additional revenue from selling one more unit to the additional cost of producing it.

Marginal Cost (MC) is the cost of producing one additional unit of output.

Economic Profit = $8,000 - $50,000 = -$42,000 (Economic loss)

Profit maximization occurs where Marginal Revenue (MR) equals Marginal Cost (MC).

A break-even point occurs when total revenue equals total cost, resulting in zero economic profit.

Normal profit occurs when economic profit is zero; it means that accounting profit equals implicit costs.

Profit maximization is the process of determining the level of output where the difference between total revenue and total cost is the greatest.

Economic profit deducts both explicit and implicit costs from total revenue, whereas accounting profit only deducts explicit costs.

Accounting Profit = Total Revenue - Explicit Costs

Implicit costs represent the opportunity costs of using owner-supplied resources. For example, if a teacher quits a job paying $50,000 to open a restaurant, the $50,000 is an implicit cost.

In a perfectly competitive market, the profit-maximizing quantity is found by producing where MR equals MC.

Accounting Profit = $30,000 - $10,000 - $12,000 = $8,000

A firm makes economic profit when total revenue is greater than total cost (including both explicit and implicit costs).