Question

3.1 What does normal profit mean? Explain the difference between normal profit and economic profit.

3.2 Explain the relationship between average product and marginal product.
3.3 In economics we consider both explicit costs and implicit costs. Differentiate between implicit and explicit
costs.

Answer 1

1) Normal profit refers to accounting profit where only explicit cost (money you pay from your account or in cash) are considered while economic profit consider explicit cost as well as implicit cost (opportunity cost or the amount of money you could have earned). Accounting profit is always greater than economic profit because of implicit cost deduction from economic profit.

2) Average product = Total Product / Quantity produced

Marginal product of current unit produced = Total product from current unit produced - Total product from previous unit produced

When marginal product is greater than average product, average product is rising. If average product is more than marginal product, marginal product is falling.

3) Explicit cost are the cost borne by producer which is paid in cash or by saving account while implicit cost are the opportunity cost which is the amount you could have been earning.

Assume you leave you job to become a producer.

Example of explicit cost: Cost of building rent, furniture, raw material cost etc.

Example of implicit cost: Amount foregone which you could have been earning from you job.