Normal profit Vs Economic profit

CFA Level I
#1

I read it over again and normal profit Vs Economic profit does not sink in with me. Can anyone explain the two in plain English - please? Thank you

#2

Economic Profit takes into account the opportunity cost. For example. If you invested $10,000 in Company A and now you have $50,000 you have an accounting profit of $40,000 on paper. However, if you could have gotten that $10,000 and invested it in Company B and made $70,000, you actually have an economic profit of -$30,000 (economic loss). That’s really it. It takes into account what you could have done. Does that help?

#3

Redbaron, Think of the fairy tale with the goose that lays the golden egg. If you decide to kill the goose to eat it, your accounting profit is one goose dinner. However your economic profit is one goose dinner minus all the golden eggs you’ve given up.

#4

haha excellent

#5

wow …

#6

i’d take the goose on any given day. u can’t eat gold eggs

#7

stratus Wrote: ------------------------------------------------------- > Redbaron, > > Think of the fairy tale with the goose that lays > the golden egg. > > If you decide to kill the goose to eat it, your > accounting profit is one goose dinner. > > However your economic profit is one goose dinner > minus all the golden eggs you’ve given up. Thats an interesting analogy. I dont think ill forget it ever.

#8

hmm i think he’s asking about NORMAL profit, as opposed to accounting profit… Normal profit is what the owner could have earned if they used their entrepreneurial skills elsewhere

#9

Thanks that does help.

#10

Does this mean that if a firm earns an economic profit, then it will be in excess of normal profit?

#11

hmmm well, economic profit INCLUDES normal profit (since it is an implicit cost), so i think its the other way around: if a firm has normal profits, then they will have economic profits…

#12

Bluey 1.8T Wrote: ------------------------------------------------------- > hmmm well, economic profit INCLUDES normal profit > (since it is an implicit cost), so i think its the > other way around: > > if a firm has normal profits, then they will have > economic profits… Actually i think it is the other way around. Economic profit includes the Normal Profit (for the industry) as well as the opportunity cost. So if Economic Profit is zero, the firm is only making the “normal profit”

#13

Quite agree with this.

#14

hmmmm but economic profit includes normal profit, so if economic profit is zero, wuoldnt that imply normal profit is also zero?

#15

??? accounting profit includes both economic profit and normal profit therefore if econ. profit = 0 (revenue= opportunity costs) acc. profit can be higher (think of lower account. expenses)

#16

econ. profit = 0 --> total revenue = total costs - that’s a definition of normal profit definition of normal profit

#17

The CFAI book, reading 16 for 2008 show Normal Profit as a component of opportunity cost. They show normal profit as a “line item” of implicit cost. Ok, I am fine with that, but they do not show how to calculate it, yet later in Econ they refer to it as a calculation. Can anyone please tell me if this calculation to arrive at normal profit is correct. Total Revenue- total explicit cost - implicit cost (other than normal profit) = normal profit. thank you