Firm: Organization that produces goods/ services to meet perceived demandWe assume that firms seek to maximize profits.All firms..1. Demand inputs2. Engage in production3. Produce outputsP= TR - TCEconomic 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 conditionsIf a firm is earning a normal rate of return…then economic profit is ZERO!!Contrasting views of profitEconomic Profit Accounting ProfitBoth explicit and implicit costs Only includes explicit costs“zero” if earning a normal rate of return Can be positive even under competitive conditionsTwo kinds of profit…• Revenue of 200,000• Use same revenue and explicit costs…• Explicit costs of 140,000• Opp cost of your time: 70,000• Accounting Profit= 60,000• Economic Profit= -10,000Why does economic profit vanish under competitive
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