Hi guys, I still get little confused whenever it comes to these two concepts. I always understand normal profit is when economic profit =0, meaning revenues you get only enuf to cover your explicit cost and implicit cost. However, in the Elan econ free ebook, on the example of calculating economic profit. Economic profits= Total revenue - total explicit cost - total implicit cost (including normal profit) And how so normal profit is larger than zero… Anyone can offer a tip to be crystal clear about this normal profit conceptually? Thanks in advance,
To start with, you want to differentiate between economic profit and ACCOUNTING profit (not economic profit and NORMAL profit). Normal profit is simply what you expect to be making doing what it is you do and that gets subtracted from accounting profit to arrive at your economic profit. Example: Holding everything else equal, if my accounting profit is $10,000 and my time is worth $2000, then my economic profit would be $8,000 (10,000-2,000). In addition to subtracting your normal profit, you also have to distinguish economic depreciation from accounting depreciation. Accounting depreciation is the amount of depreciation recorded on the books, economic depreciation is the “actual” depreciation (which is the one you want to use in your economic profit calculation). Example: Accounting profit= $10,000; Accounting depreciation=$100; Economic depreciation=$120; Normal profit=$2,000. Economic profit equals $7,980 (10,000-2,000-(120-100)) Sorry if this isn’t clear, I’m making it all up on the spot.
Indeed, it was a clear example in term of calculation… anw, is it correct if i say, normal profit is kinda “intrinsic value” of a resource. for instance, ur time and ur competency worth $2000, so all other held constant, $2000 is ur normal profit. the profit u expect to earn in any kind of job u take… One small question, how normal profit is derived then? Thanks,
Yeah, that’s pretty much it. Normal profit in this context is just an arbitrary number. You’re not expected to calculate it or anything.