profit

Examples of profit in the following topics:

• Difference Between Economic and Accounting Profit

  • The term "profit" may bring images of money to mind, but to economists, profit encompasses more than just cash.
  • In general, profit is the difference between costs and revenue, but there is a difference between accounting profit and economic profit.
  • The biggest difference between accounting and economic profit is that economic profit reflects explicit and implicit costs, while accounting profit considers only explicit costs.
  • Economic profit includes the opportunity costs associated with production and is therefore lower than accounting profit.
  • Economic profit also accounts for a longer span of time than accounting profit.

• The Supply Curve in Perfect Competition

  • The total revenue-total cost perspective and the marginal revenue-marginal cost perspective are used to find profit maximizing quantities.
  • Profit maximization is the short run or long run process that a firm uses to determine the price and output level that returns the greatest profit when producing a good or service.
  • When a table of costs and revenues is available, a firm can plot the data onto a profit curve.
  • The profit maximizing output is the one at which the profit reaches its maximum .
  • Profit maximization is directly impacts the supply and demand of a product.

• Sources and Determinants of Profit

  • Consequently, the firm earns $25,000 in economic profit.
  • Economic profits may be positive, zero, or negative.
  • In the short run, a firm can make an economic profit.
  • An economic profit of zero is also known as a normal profit.
  • Despite earning an economic profit of zero, the firm may still be earning a positive accounting profit.

• Cartel Example

  • A cartel is a formal collusive arrangement among firms with the goal of increasing profits.
  • A cartel is an agreement among competing firms to collude in order to attain higher profits.
  • Because crude oil from the Middle East was known to have few substitutes, OPEC member's profits skyrocketed.
  • Around the same time OPEC members also started cheating to try to increase individual profits.
  • In the 1970s, OPEC members successfully colluded to reduce the global production of oil, leading to higher profits for member countries.

• Monopoly Price and Profit

  • Monopolies can influence a good's price by changing output levels, which allows them to make an economic profit.
  • Monopolies, unlike perfectly competitive firms, are able to influence the price of a good and are able to make a positive economic profit.
  • We know that all firms maximize profit by setting marginal costs equal to marginal revenue.
  • For comparison, it is easy to see that if the firm produced two widgets price would be $14 and profit would be $20; if it produced four widgets price would be $13 and profit would again be $20.
  • Q=3 must be the profit-maximizing output for the monopoly.

• Marginal Cost Profit Maximization Strategy

  • In order to maximize profit, the firm should set marginal revenue (MR) equal to the marginal cost (MC).
  • Profit maximization is the short run or long run process by which a firm determines the price and output level that will result in the largest profit.
  • This strategy is based on the fact that the total profit reaches its maximum point where marginal revenue equals marginal profit .
  • This is the case because the firm will continue to produce until marginal profit is equal to zero, and marginal profit equals the marginal revenue (MR) minus the marginal cost (MC).
  • Another way of thinking about the logic is of producing up until the point of MR=MC is that if MR>MC, the firm should make more units: it is earning a profit on each.

• Collusion and Competition

  • Firms in an oligopoly can increase their profits through collusion, but collusive arrangements are inherently unstable.
  • When there are few firms in the market, they may collude to set a price or output level for the market in order to maximize industry profits .
  • The promise of bigger profits gives oligopolists an incentive to cooperate.
  • A firm may agree to collude and then break the agreement, undercutting the profits of the firms still holding to the agreement.
  • The leader will typically set the price to maximize its profits, which may not be the price that maximized other firms' profits.

• Production Outputs

  • Microeconomics assumes that firms and businesses are profit-seeking.
  • Economic Profit: The firm's average total cost is less than the price of each additional product at the profit-maximizing output.
  • Normal Profit: The average total cost equals the price at the profit-maximizing output.
  • In this case, the economic profit equals zero.
  • Shutdown: The price is below average variable cost at the profit-maximizing output.

• Profit Maximization Function for Monopolies

  • Monopolies set marginal cost equal to marginal revenue in order to maximize profit.
  • The monopoly's profits are given by the following equation:
  • Profits are represented by π.
  • This is the profit maximizing quantity of production.
  • Fourth, the monopoly profits from the increase in price, and the monopoly profit is illustrated.

• Conditions of Perfect Competition

  • A firm in a perfectly competitive market may generate a profit in the short-run, but in the long-run it will have economic profits of zero.
  • The profit is the difference between a firm's total revenue and its total cost.
  • When price is greater than average total cost, the firm is making a profit.
  • In the long-run, economic profit cannot be sustained.
  • In the long-run, the firm will make zero economic profit.