Firm Organization that produces goods services to meet perceived demand We assume that firms seek to maximize profits All firms 1 Demand inputs 2 Engage in production 3 Produce outputs P TR TC Economic Profit Focuses on economic cost also known as super profit Total costs Out of pocket expenses explicit costs Opportunity costs of other factors implicit costs Normal rate of return a return based on competitive market conditions If a firm is earning a normal rate of return then economic profit is ZERO Contrasting views of profit Economic Profit Both explicit and implicit costs Accounting Profit Only includes explicit costs zero if earning a normal rate of return Can be positive even under competitive conditions Two kinds of profit Revenue of 200 000 Use same revenue and explicit costs Explicit costs of 140 000 cid 127 Opp cost of your time 70 000 Accounting Profit 60 000 Economic Profit 10 000 Why does economic profit vanish under competitive conditions cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127
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