Dear Nhung,
I am reading Study Session 5 about the Perfect Competition. At the beginning of reading this session i get hit by terminology "economics loss" and "economics profit". I used Google search engine to find out what they means then the definition appears in the blue italics as following:
The difference between the revenue received from the sale of an output and the opportunity cost of the inputs used. This can be used as another name for "economic value added" (EVA).
Don't confuse this with 'accounting profit', which is what most people generally mean when they refer to profit.
In calculating economic profit, opportunity costs are deducted from revenues earned. Opportunity costs are the alternative returns foregone by using the chosen inputs. As a result, you can have a significant accounting profit with little to no economic profit.
For example, say you invest $100,000 to start a business, and in that year you earn $120,000 in profits. Your accounting profit would be $20,000. However, say that same year you could have earned an income of $45,000 had you been employed. Therefore, you have an economic loss of $25,000 (120,000 - 100,000 - 45,000).
As definition above I knew what economics profit is and how it is computered. However, the problem i don't understand that why in the perfect competition market the firm maximize its economics profit only when MR=MC=P. I don't understand why they called the rectangle part at the following graph "economics profit"?
Do you understand my mean? And do you know why for my answers? Please help!
PS: I suggest you should visit website http://www.investopedia.com/ for all financial terminology if you want. I think this website good then recommend you. :two:
I am reading Study Session 5 about the Perfect Competition. At the beginning of reading this session i get hit by terminology "economics loss" and "economics profit". I used Google search engine to find out what they means then the definition appears in the blue italics as following:
The difference between the revenue received from the sale of an output and the opportunity cost of the inputs used. This can be used as another name for "economic value added" (EVA).
Don't confuse this with 'accounting profit', which is what most people generally mean when they refer to profit.
In calculating economic profit, opportunity costs are deducted from revenues earned. Opportunity costs are the alternative returns foregone by using the chosen inputs. As a result, you can have a significant accounting profit with little to no economic profit.
For example, say you invest $100,000 to start a business, and in that year you earn $120,000 in profits. Your accounting profit would be $20,000. However, say that same year you could have earned an income of $45,000 had you been employed. Therefore, you have an economic loss of $25,000 (120,000 - 100,000 - 45,000).
As definition above I knew what economics profit is and how it is computered. However, the problem i don't understand that why in the perfect competition market the firm maximize its economics profit only when MR=MC=P. I don't understand why they called the rectangle part at the following graph "economics profit"?
Do you understand my mean? And do you know why for my answers? Please help!
PS: I suggest you should visit website http://www.investopedia.com/ for all financial terminology if you want. I think this website good then recommend you. :two:
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