Google
Monday 
February 17, 2020 

AmosWEB means Economics with a Touch of Whimsy!

AmosWEBWEB*pediaGLOSS*aramaECON*worldCLASS*portalQUIZ*tasticPED GuideXtra CrediteTutorA*PLS
OLIGOPOLY CHARACTERISTICS: The three most important characteristics of oligopoly are: (1) an industry dominated by a small number of large firms, (2) firms sell either identical or differentiated products, and (3) the industry has significant barriers to entry.

Visit the GLOSS*arama


ECONOMIC PROFIT:

The difference between the total opportunity cost of production and the total revenue received by a firm. Economic profit is what remains after ALL opportunity cost associated with production (including a normal profit) is deducted from the revenue generated by the production. Economic profit is one of three alternative notions of profit. The other two are accounting profit and normal profit.
Economic profit is THE indicator used by economists when the conversation turns to efficiency. In a perfect world, that is, a perfectly efficient world, no firm receives economic profit. Firms receive economic profit only when price exceeds the opportunity cost of production, which is not efficient.

But how would a firm stay in business without generating economic profit? A firm can remain in business and continue producing goods and services so long as it is able to pay ALL opportunity cost. One key opportunity cost is a normal profit, the profit entrepreneurship could earn with alternative production. Because accounting profit is generally the combination of normal profit and economic profit, zero economic profit does not mean zero accounting profit.

Revenue Minus Cost

Economic profit is the difference between total revenue and total cost. This is commonly summarized with the following equation:
economic profit=total revenue - total cost

Sources of Economic Profit

While a world of perfect efficiency would see no economic profit, in the real world, firms often do receive above-normal, economic profit. In fact, some good can be had with positive economic profit. This can be seen by noting three reasons for economic profit: (1) market control, (2) risk, and (3) innovation.
  • Market Control: One of the most common reasons for economic profit is market control by a firm. A firm has market control if it can exert some degree of influence, or control, over the market price. Market control, especially that held by monopoly and oligopoly firms, generates profit by inefficiently allocating resources. By controlling the price, a firm is able to generate more revenue, and thus more profit, than it would in a more (perfectly) competitive situation.

    This is NOT a good type of profit for the economy. It is, however, the type of profit most often encountered in the analysis of short-run production.


  • Risk: Economic profit is also generated due to the risk of organizing production. Some entrepreneurship is willing to undertake more risky production activities, and in so doing they are rewarded with greater economic profit. Risk profit is generated as a reward for undertaking a risky activity that may or may not succeed, especially launching a new business venture.

    Risk profit is a good type of profit for the economy. Without the prospect of "extra" reward, by way of economic profit, for taking the risk of production, such risky activities would not be pursued. And society would miss out on the resulting benefits.


  • Innovation: Firms also receive economic profit as a reward for innovative activity, that is introducing a new product or a technological innovation, also which may or may not succeed. Innovation profit is the reward for entrepreneurship seeking to be first onto the market with a particular good or service.

    Risk profit is also beneficial for the economy. Without the prospect of this economic profit, entrepreneurship would lack the incentive to introduce new products. And society would miss out on the resulting benefits of technological innovations. People might still be living in caves, picking berries, and gnawing on mastodon bones.


<= ECONOMIC GROWTH, SOURCESECONOMIC REPORT OF THE PRESIDENT =>


Recommended Citation:

ECONOMIC PROFIT, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2020. [Accessed: February 17, 2020].


Check Out These Related Terms...

     | accounting profit | normal profit | accounting cost | profit |


Or For A Little Background...

     | opportunity cost | explicit cost | economic cost | cost | production | production cost | business | factors of production | microeconomics | short-run production analysis |


And For Further Study...

     | total cost | variable cost | fixed cost | average cost | marginal cost | legal business organizations | firm objectives | opportunity cost, production possibilities | profit maximization |


Search Again?

Back to the WEB*pedia


APLS

BLACK DISMALAPOD
[What's This?]

Today, you are likely to spend a great deal of time strolling around a discount warehouse buying club looking to buy either a T-shirt commemorating Thor Heyerdahl's Pacific crossing aboard the Kon-Tiki or a wall poster commemorating the 2000 Olympics. Be on the lookout for door-to-door salesmen.
Your Complete Scope

This isn't me! What am I?

Helping spur the U.S. industrial revolution, Thomas Edison patented nearly 1300 inventions, 300 of which came out of his Menlo Park "invention factory" during a four-year period.
"Stand up to your obstacles and do something about them. You will find that they haven't half the strength you think they have."

-- Norman Vincent Peale

RATS
Regression Analysis of Time Series (software)
A PEDestrian's Guide
Xtra Credit
Tell us what you think about AmosWEB. Like what you see? Have suggestions for improvements? Let us know. Click the User Feedback link.

User Feedback



| AmosWEB | WEB*pedia | GLOSS*arama | ECON*world | CLASS*portal | QUIZ*tastic | PED Guide | Xtra Credit | eTutor | A*PLS |
| About Us | Terms of Use | Privacy Statement |

Thanks for visiting AmosWEB
Copyright ©2000-2020 AmosWEB*LLC
Send comments or questions to: WebMaster