The Normal Profit vs an Economic Profit
The normal profit refers to the minimal profit that a firm can generate in order to remain in the market and compete with other business effectively. The total revenue generated from the sale of the company’s products and services equals to the total cost incurred by the company. In other words the normal profit occurs when total revenue minus total cost equals to zero. The implication is that no loss or profit is made. For instance, the normal profit when revenue is $10,000 and the total costs are $10,000 is equivalent to zero.
An economic profit is a profit generated when the total opportunity costs is deducted from the total revenue. The opportunity cost represents the cost of all the inputs used to ensure a sale is made within an organization. The profit could either be positive of negative. If opportunity cost is $50,000 and the total revenue is $70,000 then the economic profit is $20,000
The example does not depict any presence of a normal profit. The total revenue is either more than the total cost or less than the total cost (Stango, & Zinman, 2009). The economic profit or loss is observed in the example since the revenues are either less or more than the total costs.
The optimal size of the plant is determined by the optimal quantity produced. The optimal quantity is one that will maximize profits and minimize the costs associated with production. Therefore, to determine the optimal size we check on the quantity that maximizes profit and minimizes costs. Therefore, we need to calculate the profit as indicated in the excel table. The profit is the difference between the total revenue and the total costs incurred.
An implicit cost represents the opportunity cost that a company faces when allocating the company resources internally. The cost is treated as a separate line item of expense and forms part of the total costs incurred. an example include the depreciation related to assets or machinery involved in project development. The implicit cost is generally not incurred by the organization in the process of production. Therefore, it becomes difficult to quantify such a cost and give the real values (Krugman, 1979). It is an imputed cost that has no basis. Only the economic profits can be computed from such a cost. An explicit cost is a cost that is incurred by the business when it carries on with its activities of production. The costs can be quantified and a value attached to it. Sometimes the quantity produced can be used to find the value of explicit costs. Additionally, the implicit costs are also referred to as the out-of-pockets costs that do not come as a result of production. Out of the implicit costs we can be able to calculate the accounting and economic costs. Examples of explicit costs include salaries paid to the employees, rent for the houses of the factory, advertisement expenses incurred during the promotion of the company’s products and services.
A fixed cost is a cost that does not vary for a specific period of time. The cost remains constant no matter the level of production. in other words the level of production does not affect or lead to the change of a fixed cost. To determine a fixed cost we check whether the cost was incurred wholesomely. Meaning the cost cannot be traced to a specific product or service. Examples include, rent salary and depreciation.
A variable cost is a cost that depends on the level of production of certain products produced by a business organization. The examples include wages that keep varying and depend on the intensity of work done by individuals.
Krugman, P. R. (1979). Increasing returns, monopolistic competition, and international trade. Journal of international Economics, 9(4), 469-479.
Stango, V., & Zinman, J. (2009). What do consumers really pay on their checking and credit card accounts? Explicit, implicit, and avoidable costs. American Economic Review, 99(2), 424-29.