Question

3. Briefly explain what is meant by: 1) account profit; 2) economic profit; and 3) zero economic profit. (include equations if any).

Answer 1

An implicit cost can be defined as the opportunity cost equal to what a firm give up for using the factor of production which it already owns and thus does not pay rent for it. Hence factory space is explicit cost.

An explicit cost is defined as the direct payment made to others for using the resources and running a business. For instance, wage, rent and materials.

TR=P*Q

Accounting profit=TR-Explicit cost

Economic profit=TR- explicit cost- (implicit cost)

Accounting profit= economic profit + implicit cost

Zero economic profit arises when total revenue are equal.

It is also known as the normal profit.

Zero economic profit=TR-TC

When TR=TC