New Age History and Economics

The Day We See The Truth And Cease To Speak it, Is The Day We Begin To Die. MLK Jr.

Saturday, March 12, 2011

prices and profits

                THE FREEMEN

Dear Brethren,

The Law of Demand states that "when prices of a commodity rise its demand will fall. That is, price of a good and its demand are negatively related, ceteris Paribas (provided that other factors remain constant)". That’s why a graph of price and quantity demanded is shown sloping downwards.

On the other hand Law of Supply states that "when prices of a good/service rise producers are more willing to supply that product in the market thus price of a good and its supply in the market are positively related, ceteris Paribas". Therefore the graph of price and quantity supplied is shown sloping upwards. [Remember producers are driven by profit and profit alone they try to make more money by releasing more stocks when the prices get higher!

Types of profits;-

There are 3 types of profit. These are accounting profit, economic profit and normal profit.

1.     Accounting profit are the revenues minus the explicit costs. These costs are directly related to the inputs of production and include the workers wages and cost of capital.

2.     Economic profit (also called abnormal profit, supernormal profit, economic rent and excess profit) are the revenues minus explicit and implicit costs. Implicit costs are the opportunity costs of production. If you spend time creating your own firm and earn more money doing that than working for someone else, then you are making an economic profit.

3.     Normal profit is when economic profit equals zero. This happens when revenues minus explicit and implicit costs are zero. In this case resources are being allocated to maximize efficiency as well as profit.

From these definitions, economic profit minus accounting profit equals opportunity costs. Likewise accounting profit minus economic profit equals minus opportunity costs.

Normal profit is defined as the level of profit necessary to cover implicit and explicit costs and this insures that opportunity costs are covered.


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