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In economics, the term profit has two related but distinct meanings. Normal profit
represents the total opportunity costs (both explicit and implicit) of a venture to an
entrepreneur or investor, whilst economic profit (also abnormal, pure, supernormal or
excess profits, or simply profit) is, in neoclassical economics at least, is the difference
between a firm's total revenue and normal profit.[1] In classical economics (economic)
profit is the return to the employer of capital stock (machinery, factory, a plough) in any
productive pursuit involving labor. These two definitions are actually the same. In both
instances economic profit is the return to an entrepreneur or a group of entrepreneurs.
Economic profit is thus contrasted with economic interest which is the return to an owner
of capital stock or money or bonds.[citation needed] A related concept is that of economic rent.
Other types of profit have been referenced, including social profit (related to
externalities). It is not to be confused with profit in finance or accounting, which is equal
to revenue minus only explicit costs,[1] or superprofit, a concept in Marxian economic
theory.
Contents
[hide]
• 1 Normal profit
• 2 Economic profit
• 3 Other applications
• 4 Maximizing profits
• 5 See also
• 6 Notes
• 7 References
• 8 External links
Only normal profits arise in circumstances of perfect competition when long run
economic equilibrium is reached; there is no incentive for firms to either enter of leave
the industry.[2]
• Monopoly rent
• Resource rent
• Intra marginal rent
All enterprises can be stated in financial capital of the owners of the enterprise. The
economic profit may include an element in recognition of the risks that an investor takes.
It is often uncertain, because of incomplete information, whether an enterprise will
succeed or not. This extra risk is included in the minimum rate of return that providers of
financial capital require, and so is treated as still a cost within economics. The size of that
return is commensurate with the riskiness associated with each type of investment, as per
the risk-return spectrum.
Economic profit does not occur in perfect competition in long run equilibrium; if it did,
there would be an incentive for new firms to enter the industry until there was no longer
any profit.[2] Once risk is accounted for, long-lasting economic profit is thus viewed as the
result of constant cost-cutting and performance improvement ahead of industry
competitors, or an inefficiency caused by monopolies or some form of market failure.
In a single-goods case, a positive economic profit happens when the firm's average cost is
less than the price of the product or service at the profit-maximizing output. The
economic profit is equal to the quantity of output multiplied by the difference between
the average cost and the price.
[edit] Notes
1. ^ a b c Carbaugh, 2006. p.84.
2. ^ a b Lipsey, 1975. pp. 285-259.
3. ^ This assumes that the behavioral assumption of profit maximization applies.
4. ^ MR also equals average revenue, AR.
[edit] References
• Albrecht, William P. (1983). Economics. Englewood Cliffs, New Jersey: Prentice-
Hall. ISBN 0132243458
• Carbaugh, Robert J. (January 2006). Contemporary economics: an applications
approach. Cengage Learning. ISBN 9780324314618.
http://books.google.com/books?id=9Pascy_5HUMC. Retrieved 3 October 2010.
• Lipsey, Richard G. (1975). An introduction to positive economics (fourth ed.).
Weidenfeld & Nicolson. pp. 214–7. ISBN 0297768999.
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