Wednesday, November 2, 2016

182. Economic profit and normal profit

4.Economic profit and normal profit The four (classic) factors of production are: Land Labour Capital Entrepreneurship. The remuneration for each are





These also form the costs to a firm.

When income equals cost it INCLUDES the remuneration to the entrepreneur = profit. This profit is called “normal” profit. It would be equivalent to what the entrepreneur would have earned had he spent his/her time and effort on the next best activity.

It is however not the goal of the entrepreneur to just earn normal profit – he wants to maximize profit – and that is where ones understanding of the “supply curve of the firm” is useful. It shows you how a firm can make “economic profit” in the short term under prefect market conditions – and maximum profit is attained not where the profit per unit is the greatest, but where MC (marginal cost) = MR (marginal revenue).

See if you understand the “supply curve of the firm”.

Let me know if you need help here.

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