MSCI311 Lecture Notes - Marginal Revenue, Capital Economics, Profit (Economics)
Document Summary
Profit = total revenue (p*q) total costs. = total revenue variable costs (in economic terminology) (operating profit = producer surplus in economic terminology) Accountants compare this operating profit with capital to find the rate of return on capital. Economics calculate economic profit from all costs, including the cost of capital calculated as the opportunity cost of capital. Definition: economic profit = total revenue (variable costs + fixed costs) Definition: normal profit = opportunity cost of capital. 0 economic profit = normal profit since it includes the opportunity cost of capital. Economic loss => economic profit < 0 (less than the opportunity cost of capital) Economic profit => economic profit > 0 (greater than the opportunity cost of capital) => find the output that maximizes profit (tr tc) Profit = tr tc = pq (wl + rk) (w = wage rate and r = opportunity cost of capital) Profit maximization => (pq wl rk)/ q = 0.