3.4 Types of Profit

• What is economic profit defined as?

  Total revenue minus all costs
• Economic profit includes both explicit and implicit
• Explicit costs are cash expenses incurred to produce goods or services.
• What is an example of an implicit cost?

  Forgone salary
• The formula for economic profit is: Total Revenue - (Explicit Costs + Implicit Costs)
• Economic profit helps firms assess their true profitability by considering all relevant costs.
• What does accounting profit consider?

  Explicit costs only
• Economic profit provides a more comprehensive view of profitability by including both explicit and implicit
• What is the formula for accounting profit?

  Total Revenue - Explicit Costs
• According to the table, what costs are considered in accounting profit?

  Explicit costs
• Accounting profit is always greater than economic profit if implicit costs are positive.
• What is normal profit defined as?

  Minimum profit to continue operations
• Normal profit ensures that the firm's resources are earning as much as they could in their next best alternative
• When economic profit is zero, a firm is earning normal profit.
• What conditions must be met for a firm to earn normal profit?

  Economic profit equals zero
• Normal profit is calculated by the formula: Economic Profit + (Explicit Costs + Implicit Costs)
• What is an explicit cost in the context of economic profit?

  Actual cash expense
• Economic profit is the difference between total revenue and all costs, including both explicit and implicit
• Accounting profit includes implicit costs.

  False
• What does an implicit cost represent?

  Opportunity cost
• Match the type of profit with its cost consideration:

  Accounting Profit ↔️ Explicit Costs

  Economic Profit ↔️ Explicit and Implicit Costs
• Normal profit occurs when economic profit is zero.
• What are the three components needed to calculate normal profit?

  Total revenue, explicit costs, implicit costs
• Supernormal profit, also known as economic rent, occurs when a firm's economic profit is greater than zero.
• Normal profit is earned when economic profit is zero.
• The key difference between supernormal and normal profit is the level of economic profit
• Supernormal profit occurs when a firm's economic profit is greater than zero
• Normal profit is when economic profit is zero
• Supernormal profit is also known as economic rent
• What is the economic profit in normal profit conditions?

  Zero
• Match the profit type with its economic profit condition:

  Supernormal Profit ↔️ > $0

  Normal Profit ↔️ = $0
• Order the steps to calculate economic profit:

  1️⃣ Calculate total revenue

  2️⃣ Calculate explicit costs

  3️⃣ Calculate implicit costs

  4️⃣ Subtract explicit and implicit costs from total revenue
• Normal profit occurs when a firm's resources are being used as efficiently as in their next best alternative
• What is the formula for calculating supernormal profit?

  $Total Revenue - (Explicit Costs + Implicit Costs)$
• The key difference between supernormal and normal profit is the level of economic profit
• Match the profit type with its economic profit condition:

  Normal Profit ↔️ = $0

  Supernormal Profit ↔️ > $0
• When does a firm earn normal profit?

  When economic profit is zero
• Economic profit is zero when a firm earns normal profit
• Normal profit occurs when the economic profit is zero
• What is the primary role of profit in resource allocation?

  Signaling efficient resource use