2. Learning outcomes
Understand
what is meant
by profit
Define normal and
abnormal profit
Understand the
difference
between
accounting and
economic profit
3. What is profit?
Profit is the reward
to the owners of
firms for taking risks
/ engaging in
enterprise
It is the difference
between revenue and
costs
Profit = TR - TC
4. Accounting vs economic profit
Economists think of
costs in a different
way to accountants
Cost to the
economist includes
opportunity cost
Using resources in
one use means they
cannot be used in
another
5. Accounting vs economic profit
A firm’s resources
can be used in
alternative ways to
generate profit
The costs of
resource use is their
opportunity cost
The profit which
could be earned
elsewhere is the
opportunity cost
6. Normal profit Normal profit is the
amount of profit
which could be
earned if resources
were used somewhere
else
It is a measure of
the opportunity cost
of enterprise
It is subtracted from
accounting profit to
get economic profit
7. Abnormal profit Normal profit occurs
when total revenue =
total cost ie economic
profit is zero
Abnormal profit
occurs when economic
profit is positive
8. Economic profit and resource
allocation The basic economic
problem is one of
scarcity
If normal profit is
not earned, resources
would be better used
elsewhere
Abnormal profit is a
signal that more
resources should be
allocated to
production of a good
