economic profit

Examples of economic profit in the following topics:

• Sources and Determinants of Profit

  • Consequently, the firm earns $25,000 in economic profit.
  • Economic profits may be positive, zero, or negative.
  • In the short run, a firm can make an economic profit.
  • An economic profit of zero is also known as a normal profit.
  • Despite earning an economic profit of zero, the firm may still be earning a positive accounting profit.

• Difference Between Economic and Accounting Profit

  • In general, profit is the difference between costs and revenue, but there is a difference between accounting profit and economic profit.
  • The biggest difference between accounting and economic profit is that economic profit reflects explicit and implicit costs, while accounting profit considers only explicit costs.
  • Economic profit includes the opportunity costs associated with production and is therefore lower than accounting profit.
  • Economic profit also accounts for a longer span of time than accounting profit.
  • The biggest difference between economic and accounting profit is that economic profit takes implicit, or opportunity, costs into consideration.

• Conditions of Perfect Competition

  • A firm in a perfectly competitive market may generate a profit in the short-run, but in the long-run it will have economic profits of zero.
  • As the price goes down, economic profits will decrease until they become zero.
  • As the price goes up, economic profits will increase until they become zero.
  • In the long-run, economic profit cannot be sustained.
  • In the long-run, the firm will make zero economic profit.

• MVA and EVA

  • ., and EVA is an estimate of a firm's economic profit.
  • In corporate finance, Economic Value Added or EVA, is an estimate of a firm's economic profit – being the value created in excess of the required return of the company's investors (being shareholders and debt holders).
  • Quite simply, EVA is the profit earned by the firm, less the cost of financing the firm's capital.
  • EVA is net operating profit after taxes (or NOPAT) less a capital charge, the latter being the product of the cost of capital and the economic capital.
  • where r is the return on investment capital (ROIC); c is the weighted average of cost of capital (WACC); K is the economic capital employed; NOPAT is the net operating profit after tax.

• Monopoly Price and Profit

  • Monopolies can influence a good's price by changing output levels, which allows them to make an economic profit.
  • Monopolies, unlike perfectly competitive firms, are able to influence the price of a good and are able to make a positive economic profit.
  • Q=3 must be the profit-maximizing output for the monopoly.
  • Because a monopoly's marginal revenue is always below the demand curve, the price will always be above the marginal cost at equilibrium, providing the firm with an economic profit .
  • This causes economic inefficiency.

• Production Outputs

  • In economic theory, the profit-maximizing amount of output in occurs when the marginal cost of producing another unit equals the marginal revenue received from selling that unit .
  • Economic Profit: The firm's average total cost is less than the price of each additional product at the profit-maximizing output.
  • The economic profit is equal to the quantity output multiplied by the difference between the average total cost and the price.
  • Normal Profit: The average total cost equals the price at the profit-maximizing output.
  • In this case, the economic profit equals zero.

• Profit and Value

  • Normal profit represents the total opportunity costs (both explicit and implicit) of a venture to an investor, whereas economic profit is the difference between a firm's total revenue and all costs (including normal profit).
  • In both classical economics and Marxian economics, profit refers to the return of capital stock (means of production or land) to an owner in any productive pursuit involving labor, or a return on bonds and money invested in capital markets.
  • By extension, in Marxian economic theory, the maximization of profit corresponds to the accumulation of capital, which is the driving force behind economic activity within capitalist economic systems.
  • It is a standard economic assumption (though not necessarily a perfect one in the real world) that other things being equal, a firm will attempt to maximize its profits.
  • Economic value is a measure of the benefit that an economic actor can gain from either a good or service.

• The Supply Curve in Perfect Competition

  • In economics, a cost curve is a graph that shows the costs of production as a function of total quantity produced.
  • Profit maximization is the short run or long run process that a firm uses to determine the price and output level that returns the greatest profit when producing a good or service.
  • When a table of costs and revenues is available, a firm can plot the data onto a profit curve.
  • The profit maximizing output is the one at which the profit reaches its maximum .
  • Profit maximization is directly impacts the supply and demand of a product.

• Cartel Example

  • A cartel is a formal collusive arrangement among firms with the goal of increasing profits.
  • A cartel is an agreement among competing firms to collude in order to attain higher profits.
  • Because crude oil from the Middle East was known to have few substitutes, OPEC member's profits skyrocketed.
  • Around the same time OPEC members also started cheating to try to increase individual profits.
  • In the 1970s, OPEC members successfully colluded to reduce the global production of oil, leading to higher profits for member countries.

• Collusion and Competition

  • Firms in an oligopoly can increase their profits through collusion, but collusive arrangements are inherently unstable.
  • When there are few firms in the market, they may collude to set a price or output level for the market in order to maximize industry profits .
  • The promise of bigger profits gives oligopolists an incentive to cooperate.
  • A firm may agree to collude and then break the agreement, undercutting the profits of the firms still holding to the agreement.
  • The leader will typically set the price to maximize its profits, which may not be the price that maximized other firms' profits.