U3 M52 Flashcards

What is the definition of profit?

The financial gain obtained when total revenue exceeds total costs.

What types of costs do accountants focus on?

Explicit costs only.

What is the difference between explicit and implicit costs?

Explicit costs are out-of-pocket payments, while implicit costs are opportunity costs of using one's own resources.

What formula is used to calculate accounting profit?

Total Revenue - Accounting Costs (Explicit Costs only).

What is normal profit?

When total revenue equals explicit plus implicit costs.

What is economic profit?

Total Revenue - Economic Costs (Explicit + Implicit Costs).

What is the profit-maximizing rule in short-run profit maximization?

Firms should produce until Marginal Revenue (MR) equals Marginal Cost (MC).

If economic profit is zero, what must be true for accounting profit?

Accounting profit must equal normal profit.

In a perfectly competitive market, what happens if firms earn excessive profit?

Firms will enter the market until profits are driven down to normal profit levels.

What are examples of implicit costs

forgone wages, forgone rent, time, lost interest on withdrawn bonds

What are examples of explicit costs

Rent, Wages, Materials, Electricity Bills