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Math Help - Microeconomics Normal/Economic Profit

  1. #1
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    Microeconomics Normal/Economic Profit

    Price: $10
    Quantity: 10,000
    ATC: $10
    Explicit Cost: $40,000

    What is the formula to find normal profit and economic profit for this firm?
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  2. #2
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    The normal (I guess it's another way for saying financial) profit is the difference between total revenue and total costs where the costs are only monetary. On the other hand, the economic profit takes into account also non-monetary costs (such as the opportunity cost) so you have to deduct these as well.

    In your given numbers I don't see any hidden costs though...
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  3. #3
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    Profit (economics) - Wikipedia, the free encyclopedia

    Economic profit: The difference between revenue and the opportunity cost of your inputs
    Normal profit: The accounting profit at which economic profits are zero. This is the minimum level of accounting profit at which the business will have an incentive to trade.

    Using the OP's figures:
    Revenue = 10,000 * 10 = 100,000
    Total cost = 10,000 * 10 = 100,000
    Explicit Cost = 40,000
    Implicit Cost = 100,000 - 40,000 = 60,000



    Accounting profit = Revenue - Explicit Cost = 60000
    Economic profit = Revenue - Implicit cost - Explicit Cost = 0
    Normal Profit = Revenue - Explicit Cost - Economic Profit = 60000

    (equivalently: Normal Profit = Implicit cost. Can you see why?)

    In this case, the normal profit is equal to the accounting profit. This is not true in general using the definition of normal profits that i was taught. However, liudas' post shows that different professors may define normal profits differently, and you should review your course notes.
    Last edited by SpringFan25; August 2nd 2010 at 12:59 PM.
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