AP Economics

Mr. Bernstein

Module 52: Defining Profit

November 2015

2

AP EconomicsMr. Bernstein

Understanding Profit• Economists and Accountants differ on the definition

of profit• Both explicit and implicit costs are used in

calculating opportunity costs• Explicit costs are moneys actually paid out (ie rent,

interest on debt, cost of raw materials, labor, utility bills, depreciation…”Accounting costs”)

• Implicit costs do not require cash outlay (ie foregone salary, interest or rent when capital or the owner’s time and energy are used elsewhere…included in ”Economic costs”)

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AP EconomicsMr. Bernstein

Defining Profit• Profit = TR – TC• TR = P x Q• (precise definition of TC will be covered in Module

55)• Economists use p to represent profit• But Economists include both explicit and implicit

costs in determining economic profit…

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AP EconomicsMr. Bernstein

Normal Profit• Economic Profit = zero is said to be “Normal

Profit”• = TR - all opportunity costs (explicit AND implicit

costs)• When a firm is earning a normal profit, it can do

no better using resources in the next best alternative use

• …so zero Economic Profit is not so bad!