Question

1. What did you learn about profit and why is it important?
2. What is the difference between accounting versus economic profit?
3. Why in perfectly competitive business environment firms earn zero economic profit in the long-run?

Answer 1

1.

Profit in simple terms is the gain of a company or a firm is looking by doing business

Profit in mathematical terms is expressed as the difference between total revenue and the total cost generated

A firm main goal is to maximize the profit and welfare of the shareholders

Maximization ofprofit occurs at a point where marginal revenue intersects the marginal cost

2.

Accounting profit in simple terms is the difference of total revenue and total cost

It is the explicit cost which is recorded in the book

If we talk about the economic profit then it has one more factor which is called implicit cost

Implicit cost are also called opportunity cost

These are the cost which are incurred by the company but do not recorded in the book

For example let's say If a company hires some employees then it will spend some money and time to train them but this training fee will not be included in the income statement of the company

Hence economic profit is the difference of total revenue, total cost and implicit cost

3.

Perfect competition is a market type in which

There are large number of buyers and sellers in the market

Price is only decided by the market forces that is demand and supply

There are no barriers to entry and exit in the market

So there are no barriers therefore many number of firms get into the market easily and in the long run too large number of sellers the supply exceeds the demand which causes many firms to earn only normal profit

The normal profit is also called zero economic profit