ptofit and loss account6

May 13th, 2015
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profit and loss statement describe ECONOMIC PROFIT

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ECONOMIC PROFIT:The difference between the total opportunity cost of production and the total revenue received by a firm .Economic profit is what remains after ALL opportunity cost associated with production (including a normal profit) is deducted from the revenue generated by the production. Economic profit is one of three alternative notions of profit. The other two are accounting profit and normal profit.Economic profit is THE indicator used byeconomists when the conversation turns toefficiency. In a perfect world, that is, a perfectly efficient world, nofirmreceives economic profit. Firms receive economic profit only whenpriceexceeds theopportunity costofproduction, which is not efficient.But how would a firm stay in business without generating economic profit? A firm can remain in business and continue producing goods and services so long as it is able to pay ALL opportunity cost. One key opportunity cost is a normal profit, the profitentrepreneurshipcould earn with alternative production. Because accounting profit is generally the combination of normal profit and economic profit, zero economic profit does not mean zero accounting profit.Revenue minus Cost:Economic profit is the difference betweentotal revenueandtotal cost. This is commonly summarized with the following equation:economic profit=total revenue - total costSources of Economic Profit:While a world of perfect efficiency would see no economic profit, in the real world,

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