Economic profit is the total revenue generated by a business minus total opportunity costs. It is a more theoretical way of looking at a company's profitability that differs from the standard accounting profit reflected on the company's income statement, which simply subtracts the cost of producing goods and services from total revenue.Know More
Accounting for profit ordinarily involves evaluating actual revenue that came into the business against actual expenses that were paid. Another way of looking at overall profitability is to assign a cost to the opportunities that the business couldn't capitalize on, known as the total opportunity cost. Lost opportunities include such things as the difference in a discount the company could have received on raw materials if it had the cash flow to buy in bulk and other business opportunities or adjustments that would have increased profitability under ideal circumstances.
Economic profit, also known as economic value added, is almost always lower than actual profit because it factors in scenarios that resulted in the business making less profit than it could have optimally made. Considering economic profit along with actual profit allows a company's stakeholders to evaluate the performance of the people running the business, since opportunity cost often reflects management decisions made to direct operations.Learn more about Economics
The profit maximizing rule stats that profit = total revenue - total costs, meaning that profit maximization occurs where the largest gap between total revenue and total cost is found. The rule is by no means concrete when applied to the real world, but does offer a fairly accurate prediction of how a business can fully realize profit potentials.Full Answer >
Economic disequilibrium is a state where market equilibrium is unreachable due to internal or external variables. Disequilibrium can also occur when internal or external variables result in a disruption to the balance in the market. It is also a result of long-term structural imbalances or short-term changes in market variables.Full Answer >
Economic viability is when a project proves to be economically feasible, innovative and sustainable in terms of investing financial resources into the project. Funding for the project must be compatible with the demands and constraints that occur during the project's life span.Full Answer >
The economic perspective focuses on how resources are distributed in an organizational setting. Philosophies that stem from the economic perspective concentrate on leveraging or manipulating those resources.Full Answer >