ECON1101 - The Three Concepts of Profit

PROFITvsREVENUE.jpg

These three concept diagrams make clear the meanings of total revenue, economic profit, accounting profit, explicit costs and implicit costs.

Total Revenue is all the money the firm brings in.

Accounting Profit is the money left over after explicit costs are deducted.

Economic Profit is what's left after the Explicit and Implicit costs are deducted.

Normal Profit is when the accounting profit = implicit costs (hence no economic profit).

If the firm is selling at less than the average variable cost then it is making an economic loss and should shut down temporarily. (Incurring a loss of the Total Fixed Cost - i.e. plant costs etc).

If the firm is selling at greater than the minimum average variable cost then it produces such that it is making normal profit (MR = MC).

If the firm is selling at greater than the average variable cost then it is in economic profit.