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Questions and Answers
What is the formula for calculating profit in economics?
Profit = Total revenue - Total costs
What costs do economists consider in profit calculation?
Economists consider both implicit (opportunity) and explicit costs in profit calculation.
What costs do accountants consider in profit calculation?
Accountants only consider explicit costs in profit calculation.
According to economists' view, what is the economic profit for Company A?
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What is the minimum profit needed to keep factors of production in current use?
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What is the condition for determining super normal profit?
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Study Notes
- Profit in economics is calculated as total revenue minus total costs.
- Economists consider both implicit (opportunity) and explicit costs in profit calculation.
- Accountants only consider explicit costs in profit calculation.
- Three companies (A, B, C) making laptops, with accounting profits of £100,000 (A), £110,000 (B), and £90,000 (C).
- Opportunity cost for all companies would have been making tablets instead of laptops, resulting in a profit of £100,000 for each.
- Economists' view: Company A has zero economic profit, Company B has economic profit of £10,000, and Company C has an economic loss of £10,000.
- Normal profit is the minimum profit needed to keep factors of production in current use.
- Super normal profit (above normal profit) and sub normal profit (below normal profit) are economic profits or losses.
- Conditions for determining profit level: AR = AC (normal profit), AR > AC (super normal profit), and AR < AC (sub normal profit).
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Description
Test your knowledge on economic and accounting profit, including implicit and explicit costs, opportunity cost, normal profit, and conditions for determining profit levels.
