Also known as overhead costs.Į.g.: rent, even if production has not started, the firm still has to pay the rent. They are incurred even when the output is 0 and will remain the same in the short run. They would have to earn more than a teacher’s salary to be earning an economic profit.Fixed Costs are costs that do not vary with output produced or sold in the short run. This person would still be earning an accounting profit. A teacher who quits teaching to become a street performer would break even (earn zero economic profit) if they earn a teacher’s salary by street performing. When that occurs, the entrepreneur will be earning whatever they could be earning doing the next best alternative. On the firm graphs, price will equal the average total cost (ATC). When a firm is earning zero economic profit, its total revenue equals its total costs (both implicit and explicit).
If they are making zero economic profit (breaking even), they are still making an accounting profit.īreaking Even or Zero Economic Profit (AKA – Normal Profit) If they are suffering a loss, it is an economic loss. So if a firm is making a profit, it is an economic profit.
On every one of the firm graphs, both implicit and explicit costs are contained within the cost curves.
#Break even point formula graph khan academy software
So for this website, economic profit would subtract not only the hosting and software costs but also the cost of my time (labor) for creating the content. Economic profit is Total Revenue minus Explicit and Implicit costs. Note: Accounting profit is always higher than economic profit.Įconomic Profit: Economic Profit is much more important to economists than accounting profit. For this website, accounting profit would be the revenue generated for the ads minus the web hosting fees and the cost of the software. In microeconomics there are actually two types of profit you need to know: accounting profit and economic profit.Īccounting Profit: Accounting Profit is what most people think of as profit and although it isn’t nearly as important as economic profit, it shows up on many economics exams.Īccounting profit is total revenue minus explicit costs. The implicit costs associated with producing this website include the value of my evening leisure time. Implicit cost: Implicit costs are the implied costs, or the value of opportunities lost (aside from out of pocket money costs). Explicit costs for this website are the hosting fees, the cost of the software, etc. These ideas were touched on in the opportunity cost review, but here we are going to use terminology as it relates to a firm (business).Įxplicit cost: Explicit costs are the out of pocket costs paid by the business owner. There are two types of costs you need to know in microeconomics.
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