9-3Measuring Economic Profit - Firms Maximize Profit Profit...

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1 Measuring Economic Profit Chapter 9-3 Firms Maximize Profit Profit is the difference between total revenue and total cost. Profit = total revenue – total cost Firms Maximize Profit • Economists and accountants measure profit differently. –Accountants focus on explicit costs and revenue. –Economist focus on both explicit and implicit costs and revenue. Firms Maximize Profit • For an economist, total cost is explicit payments to factors of production plus plus the opportunity cost opportunity cost of the factors provided by the owners of the firm. Firms Maximize Profit • Economists define total revenue as the amount a firm receives for selling its good or service plus any increase in the value of the assets owned by firms. Firms Maximize Profit • For economists: Economic profit = Economic profit = (explicit and implicit revenue) (explicit and implicit revenue) Minus Minus (explicit and implicit cost) (explicit and implicit cost)
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2 Accounting Profit • The profit figure reported in annual reports
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9-3Measuring Economic Profit - Firms Maximize Profit Profit...

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