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Defining Profit

Module. Micro: Econ:. 16. 52. Defining Profit. KRUGMAN'S MICROECONOMICS for AP*. Margaret Ray and David Anderson. Question P7. Let’s pretend that you have opened a new restaurant in Livingston – BTC “better than Chipotle” Café.

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Defining Profit

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  1. Module Micro: Econ: 16 52 Defining Profit • KRUGMAN'S • MICROECONOMICS for AP* Margaret Ray and David Anderson

  2. Question P7 • Let’s pretend that you have opened a new restaurant in Livingston – BTC “better than Chipotle” Café. • Given the affluent, ever hungry student body at the local high school, you can sell an unlimited number of burritos at $5 each. • Classify the costs of your business into logical categories. • As the owner, what is your time worth?

  3. Question P8 • Let’s pretend that you have opened a new restaurant in Livingston – BTC “better than Chipotle” Café. • Given the affluent, ever hungry student body at the local high school, you can sell an unlimited number of burritos at $5 each. • How would you decide how much to supply?

  4. What you will learnin thisModule: • How do we know if a business is profitable? • The difference between explicit and implicit costs and their importance in decision making. • The different types of profit, including economic profit, accounting profit, and normal profit. • How to calculate profit.

  5. Understanding Profit • Implicit versus explicit costs • Accounting profit versus economic profit • Normal profit

  6. Defining Profit • Profit is equal to total revenue minus total cost • Economists use the symbol π to represent profit π = total revenue – total cost π = TR – TC • Total revenue equals the price paid times the number sold. TR = P x Q

  7. Accounting versus Economic Profit • Accounting costs include only EXPLICIT costs • Accounting profit equals total revenue minus total EXPLICIT costs Accounting π = TR – TC (explicit) • Economic costs include BOTH explicit and implicit costs • Economic profit is total revenue minus total costs (including both explicit and implicit costs) π = TR – TC (explicit + implicit)

  8. Practice • Krugman page 535 FR #2 • Sunny’s Snow Cone

  9. 3 Way Practice • Three person pods • Krugman page 578 • Problems 1, 2, 3 • Each person takes one problem. • Finish & present to team mates. • Hand in your problem solution. Timer

  10. Normal Profit • An economic profit equal to zero is known as a “Normal profit” • A normal profit means that all costs (explicit and implicit) are covered by revenues. • When a firm is earning a normal profit, it can do no better using resources in the next best alternative use.

  11. Summary • Economic vs. Accounting Profit. • Accounting profit includes explicit costs. • Economic profit includes both explicit costs and implicit costs. • Implicit costs are opportunity cost based – cost of capital and value of the owner’s labor.

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