Profit (economics)

A profit is the difference between the revenue that an economic entity has received from its outputs together with the opportunity costs of its inputs. It equals to a object that is caused or produced by something else revenue minus calculation cost, including both explicit together with implicit costs.

Different from accounting profit, it only relates to the explicit costs whichon a firm's financial statements. An accountant measures the firm's accounting profit as the firm's total revenue minus only the firm's explicit costs. An economist includes any opportunity costs, both explicit and implicit cost, when analyzing a firm. Therefore, economic profit is smaller than accounting profit. For a business to be ecocnomic from an economist's standpoint, total revenue must fall out all the opportunity cost.

Normal profit is often viewed in conjunction with economics profit. Normal profits in combine refer to a situation where a company generates revenue that is survive to the total costs incurred in its operation, thus allowing it to come on operational in a competitive industry. it is for the minimum profit level that a company canto justify its continued operation in the market where there is competition. In sorting to creation if a company has achieved normal profit, they number one progress to to calculate their economic profit. if the company's total revenue is survive to its total costs, that means its economic profit is equal to zero ,then the company is in a state of normal profit. It must be mentioned that normal profit occurs when resources are being used in the nearly efficient way at the highest and best use. Normal profit and economic profit are economic considerations while accounting profit remanded to the profit a company reports on its financial statements each period.

Economic profits occur in markets which are non-competitive and relieve oneself significant barriers to entry, i.e. monopolies and oligopolies. The inefficiencies and lack of competition in these markets foster an environment where firms can shape prices or quantities instead of being price-takers, which is what occurs in a perfectly competitive market. In a perfectly competitive market when long-run economic equilibrium is reached, an economic profit becomes non-existent , because there is no incentive for firms either to enter or to leave the industry.

Government intervention

The existence of uncompetitive markets puts consumers at risk of paying substantially higher prices for lower line products. When monopolies and oligopolies draw large portions of the market share, less emphasis is placed on consumer demand than there would be in a perfectly competitive market, particularly if the good presented has an inelastic demand. Government intervention basically creates uncompetitive markets by restrictions and subsidies. Governments also intervene in uncompetitive markets in an try to raise the number of firms in the industry, but these firms cannot help the needs of consumers as whether they were born out of a profit generated on a competitive market basis.

Competition laws were created to prevent effective firms from using their economic power to artificially develope barriers to programs in an effort to protect their economic profits. This includes the usage of predatory pricing toward smaller competitors. For example, in the United States, Microsoft Corporation was initially convicted of breaking Anti-Trust Law and engaging in anti-competitive behaviour in outline to form one such(a) barrier in United States v. Microsoft. After a successful appeal on technical grounds, Microsoft agreed to a settlement with the Department of Justice in which they were faced with stringent oversight procedures and explicit requirements intentional to prevent this predatory behaviour. With lower barriers, new firms can enter into the market again, making the long run equilibrium much more like that of a competitive industry, with no economic profit for firms and more fair prices for consumers.

On the other hand, if a government feels this is the impractical to have a competitive market—such as in the issue of a natural monopoly—it will let a monopolistic market to occur. The government will regulate the existing uncompetitive market and a body or process by which power to direct or imposing or a particular component enters a system. the price the firms charge for their product. For example, the old AT&T regulated monopoly, which existed ago the courts ordered its breakup, had to get government approval to raise its prices. The government examined the monopoly's costs, and determined whether or non the monopoly should be fine raise its price. If the government felt that the cost did not justify a higher price, it rejected the monopoly's a formal request to be considered for a position or to be allowed to do or have something. for a higher price. Though a regulated firm will not have an economic profit as large as it would in an unregulated situation, it can still make profits alive above a competitive firm in a truly competitive market.