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.

• 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.

• 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.

• Microeconomics

  • Microeconomics deals with the economic interactions of a specific person, a single entity, or a company.
  • Microeconomics assumes businesses are rational and produce goods that maximizes their profit.
  • If each firm takes the most profitable path, the principles of microeconomics state that the market's limited resources will be allocated efficiently.
  • Urban Economics: challenges faced by cities, such as sprawl, traffic congestion, and poverty.
  • Law and Economics: applies economic principles to the selection and enforcement of legal regimes.

• Assumptions

  • Economists use assumptions in order to simplify economics processes so that they are easier to understand.
  • As a field, economics deals with complex processes and studies substantial amounts of information.
  • Individuals maximize utility (as consumers) and firms maximize profit (as producers).
  • Examples of such assumptions include perfect information, profit maximization, and rational choices.
  • Assess the benefits and drawbacks of using simplifying assumptions in economics