AP Economics
Mr. Bernstein
Module 52:
Defining Profit
November 2015
AP Economics
Mr. Bernstein
Understanding Profit
• Economists and Accountants differ on the
definition of profit
• Both explicit and implicit costs are used in
calculating opportunity costs
• Explicit costs are moneys actually paid out (ie rent,
interest on debt, cost of raw materials, labor, utility
bills, depreciation…”Accounting costs”)
• Implicit costs do not require cash outlay (ie foregone
salary, interest or rent when capital or the owner’s time
and energy are used elsewhere…included in ”Economic
costs”)
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AP Economics
Mr. Bernstein
Defining Profit
• Profit = TR – TC
• TR = P x Q
• (precise definition of TC will be covered in Module
55)
• Economists use p to represent profit
• But Economists include both explicit and implicit
costs in determining economic profit…
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AP Economics
Mr. Bernstein
Normal Profit
• Economic Profit = zero is said to be “Normal
Profit”
• = TR - all opportunity costs (explicit AND implicit
costs)
• When a firm is earning a normal profit, it can do
no better using resources in the next best
alternative use
• …so zero Economic Profit is not so bad!
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