hi everybody Jacob Reed here from review econ.com today we're going to be talking about different types of profit and profit maximization if after watching this video you still need a little more help head over to review econ.com and pick up the total review booklet it has everything you need to know to Ace your microeconomics or macroeconomics exam let's get into the content now the first thing we're going to talk about is the two different types of profit that you need to know the first type is called accounting profit our second type of profit is called economic profit and that one is going to be more important within this class now when it comes to calculating accounting profit we are going to be taking the total revenue that a firm earns remember we've already learned that's the price of the product times the quantity sold and then we're going to subtract from that the explicit costs of running the business these explicit costs are both fixed and variable it's the amount of money that the entrepreneur pays out of their pocket for producing the good or service that they're selling now when it comes to calculating the economic profit we still take the total revenue and subtract the explicit costs but we will also subtract the implied or implicit costs as well the implicit cost is the lost money that the entrepreneur could have earned had they not made a product essentially it's the value of the opportunity cost that the entrepreneur has in this class when we use the term no normal profit we mean that economic profit is zero and when a firm is earning a normal profit the accounting profit will be equal to the implicit cost let's say for example a teacher quits teaching to open up their own restaurant let's assume that their previous salary was fifty thousand dollars their explicit fixed costs are ten thousand dollars they're variable explicit costs are twelve thousand dollars all while their total revenue for their restaurant is thirty thousand dollars we can calculate this teacher's accounting profit by taking the total revenue and subtracting the explicit costs both the fixed and the variable that gives us thirty thousand dollars minus the ten thousand plus the twenty thousand bringing us to eight thousand dollars of accounting profit for this entrepreneur that used to be a teacher now if we wanted to calculate the economic profit for this former teacher we are going to take the eight thousand dollars of accounting profit and subtract the fifty thousand dollars of implicit cost that's the money this entrepreneur could have earned had they still been a teacher so this restaurant owner is earning negative forty two thousand dollars of economic profit that is a huge economic loss despite the accounting in profit if a fast food worker on the other hand quits their job to become a YouTuber let's say they have a previous income of thirty five thousand dollars a year while working as a fast food worker they have an explicit fixed cost of five thousand dollars for their YouTube channel they have a variable cost of three thousand dollars for their YouTube channel and a total revenue for being a YouTuber of forty eight thousand dollars their accounting profit once again is the total revenue minus the explicit costs both fixed and variable bringing us to a total of forty thousand dollars worth of accounting profit for this YouTuber if we take that accounting profit and subtract the implied cost of thirty five thousand dollars from their previous job that brings us to an economic profit of five thousand dollars that means this YouTuber is earning more than they did as a fast food worker which is their next best alternative finally we have one more example let's say that a housekeeper quits their job to open up a house cleaning service this entrepreneur had a previous income of thirty eight thousand dollar dollars this business has an explicit fixed cost of one thousand dollars they have an explicit variable cost of ten thousand dollars and a total revenue of forty nine thousand dollars the accounting profit for this entrepreneur is the forty nine thousand dollars of total revenue minus the ten thousand dollars explicit variable cost and one thousand dollars of explicit fixed costs bringing us to thirty eight thousand dollars of accounting profit if we go ahead and subtract the thirty eight thousand dollars from the accounting profit that gives us zero dollars of economic profit that means this housekeeper turned entrepreneur is earning a normal profit and they are breaking even and you'll notice that breaking even is not necessarily A Bad Thing it means that your accounting profit is equal to your next best alternative in this case being a housekeeper I'd like to point out that you could have both explicit and implicit variable and fixed costs but if it's not in the question it doesn't exist so keep that in mind if you see these questions on your exam next we're going to be talking about profit maximization for a firm we're looking at how much output a firm should produce given their costs and revenue if we take a look at a graph right here here we have a total revenue curve for a firm in a competitive market and we have the total cost curve as well now this is all the costs both the implicit and explicit fixed costs and variable costs whenever the total cost is greater than the total revenue those are the quantities where the firm will earn economic losses at the quantities where the total cost equals the total revenue that's where the firm is breaking even or earning zero economic profit and when the total cost is less than the total revenue that's where we see economic profits now finding that profit maximizing quantity can be tricky when you're looking at this graph but it's the place where the total revenue is greater than the total cost by the largest amount it's approximately right there and this firm will profit maximize if it produces qf as their quantity of output but you should already know that most decisions are not made based on totals in microeconomics decisions are made at the margin and that's going to be true most of the time for profit maximization as well so when it comes to finding profit maximization this is again going to be an application of marginal analysis that you learned back in unit one remember benefit maximization is found where marginal benefit equals marginal cost it's so important it's the formula on my hat right there now when it comes to profit maximization for an individual firm you're not going to see marginal benefit and that's because the marginal benefit for a firm is not called marginal benefit a firm's benefit for producing more units of output is the revenue they earn for selling that output and here we're looking at marginal revenue marginal revenue is found by finding the change in the total revenue divided by the change in quantity it's essentially the revenue a firm brings in for producing one more unit of output and since the change in quantity will almost always be just one we can usually just find the change in total revenue to find the marginal revenue and so the profit maximizing quantity of output will always be found where Mr equals MC so that's where marginal revenue equals marginal cost next we're going to look at how to find that profit maximizing quantity of output here we have a graph we have a marginal revenue curve and a marginal cost curve this is a graph for a perfectly competitive firm you'll learn more about that in this unit but on this graph you can see that at low quantities the marginal revenue is going to be greater than the marginal cost if that's the case The Firm will increase profit if they continue to produce more units of output at higher quantities of output the marginal revenue will be less than the marginal cost there the firm is losing profit by continuing to produce and so the profit maximizing quantity is found where marginal revenue equals marginal cost here we have another graph that you will see in unit 4. this is a graph for a monopoly and once again at low units of output the marginal revenue for this quantity will be greater than the marginal cost for that quantity and so continuing to produce more output will actually increase profit for this firm at high quantities of output we have the marginal revenue being less than the marginal cost and they're continuing to produce actually decreases profit and so once again finding the intersection between those two curves gives us the quantity Where the marginal revenue equals the marginal cost this is the profit maximizing or loss minimizing quantity for this firm it cannot do any better than that quantity of output now let's take a look at finding profit maximization by the Numbers here we have a firm's total cost and total revenue for different quantities of output when it comes to numbers The Firm should produce as long as the marginal revenue is greater than or equal to the marginal cost but they should not produce whenever the marginal revenue is less than the marginal cost and while we could figure it out with the totals marginal analysis means we need to look at marginal numbers so let's go ahead and find our margin original cost and marginal revenue numbers here at two units of output we have a marginal cost of four dollars and a marginal revenue of eleven dollars that means producing this unit will actually increase profit for this firm by seven dollars that's the difference between the marginal revenue and the marginal cost if this firm produces another unit of output now we have three units the marginal cost of that fifth unit is five dollars and the marginal revenue brought in is nine dollars this unit increases profit by four dollars next we've got our fourth unit with a marginal cost of six dollars and the marginal revenue of seven dollars since this unit once again increases profit by a dollar this firm should make that unit as well if this firm moves on to the fifth unit though now the marginal cost is seven dollars and the marginal revenue is only five producing this unit would actually decrease profit by two dollars and so this firm's profit maximizing quantity is four units of output that is the highest quantity this firm can produce where where the marginal revenue is greater than the marginal cost and producing the next unit of output will have a marginal revenue less than the marginal cost now if this was an AP microeconomics frq you would want to explain not only why this firm would produce four units but also explain why the fifth unit would not be produced so to explain we would say this firm produces four units of output because seven dollars of marginal revenue is greater than six dollars of marginal cost but at five units five dollars of marginal revenue is less than six dollars of marginal cost and there you have it that's what you need to know about different kinds of profit and profit maximizing quantities if you're ready to practice head over to review econ.com and play The Profit game if you still need more help after that pick up the total review booklet it has everything you need to know to Ace your microeconomics or macroeconomics exam that's it for now I'll see you all next time