TYPES OF PROFIT:
Accounting Profit-is simply total revenue - total costs. Accountants only count direct or explicit costs like rent, wages, capital purchase, and depreciation.
Economic Profit:includes all of the accounting costs listed above PLUS the implicit or opportunity cost of time and money on the next best alternative.
Normal profit: A normal profit is equal to 0 economic profit. It is equal to the opportunity cost of the alternative choice and includes revenue that is equal to economic costs.
PROFIT MAXIMIZATION: MR=MC
To figure out optimal output look for the maximum output where MR is as close to MC as possible. This is true for ALL market structures.
Order of operation:
2. The level of output where MR=MC
3. The price at the MR=MC output compared to the ATC
a. If P>ATC--Economic Profit
b. If P=ATC--Normal Profit
c. If P < ATC but greater than AVC--Loss Minimizing
d. If P < AVC the firm will shut down