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.
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
The formula for the market value of debt is E((1-(1/(1 + R)^Y))/R) + T/(1 + R)^Y, where E is the annual interest expense, R is the cost of debt, T is the total debt and Y is the average maturity, in years, of the debt. However, calculating the market value of debt can be tricky, because not many firms carry their debt in bond form.Full Answer >
An example of the way a market economy works is how new technology is priced very high when it is first available for purchase, but the price goes down when more of that technology becomes available. This kind of price fluctuation is a central component of a market economy. That is, supply and demand dictates prices.Full Answer >
Economics and economic education are important for providing people with valuable insight into how foreign and domestic markets operate, which allows them to make reasoned and rational choices for short-term and long-term financial benefits. Studying economics also allows people to learn how to manage and most effectively use scare and finite resources such as time and money. Studying economics equips people with varying levels of financial literacy, which allows them to effectively manage their own finances and even advise others in financial management and planning, too.Full Answer >
According to the International Monetary Fund, inflation is an important economic statistic because it affects the value of money and indicates the overall stability of a country's economy. Inflation is a gradual continuous increase in the price of goods and services. A stable yearly inflation amount is typically between two and four percent, reports Economics Help.Full Answer >