The concept of economic profit, the difference between profit and economic profit

Economic profit is the difference between a firm's benefits and its costs, including the benefits that can be obtained from the use of the most advantageous other vendor's resources.

Economic profit, which can be expressed as the return on invested capital minus the cost of capital, multiplied by the amount of capital.

Economic Profit (Return on Invested Capital Weighted Average Cost of Capital) Amount of capital invested.

The goal of the business should be to maximize long-term economic profits, not to maximize the return on invested capital (ROIC).

The economic profit method and the discounted cash flow (DCF) method should be used to evaluate the value of a business, and the result should be the same. If the same cost of capital is used to discount future economic profits, and then the discounted economic profits are added to the amount of capital that has been invested so far, the result can be exactly equal to that of the DCF method.

The concept of economic profit, profit is calculated by valuing the net assets at the end of the period of the business and comparing it to the opening value, but in the calculation process, transactions with the owner must be excluded. For example, an enterprise with net assets at the end of the period of $80,000 and net assets at the beginning of the period of $76,000 would have a gain of $4,000 ($80,000-76,000) without dealing with the owner. If an additional $10,000 is issued and a dividend of $8,000 is paid during the period, the profit is $2,000 [(80,000-76,000-(10,000-8,000)].

The so-called profit is the normal profit.

Normal profit is a component of the cost, the remuneration paid to the entrepreneur for the capital investment. Economic profit is the difference between total revenue and total cost. It is important to note that the total cost includes the opportunity cost.

Entrepreneur profit (normal profit) is usually positive, but the term economic profit can be both positive and negative (loss).

That's why opportunity costs are included:

In the case of a perfectly competitive market, conditions arise when the marginal cost is equal to the marginal income, profit maximization or loss minimization. If the market** is lower than the total average cost, which means that the economic profit is negative, the entrepreneur needs to compare the value of this loss with the average variable cost. If the business is to continue to operate, the negative economic profit must not be less than the average variable cost, otherwise the entrepreneur would rather close the business than continue to bear the loss.

FYI.

Normal profit refers to the income that an entrepreneur may receive if he or or she uses resources for other businesses with the same risk, which is an opportunity cost nature.

In Western economics, normal profit refers to the remuneration and payment of the entrepreneur provided by the manufacturer, and the normal profit is part of the hidden cost.

Normal profit usually refers to the remuneration paid by the manufacturer for the entrepreneurial talent it provides. From the perspective of opportunity cost, it is part of the manufacturer's production cost, and the hidden cost is included in the cost.

Normal profit is the remuneration of the entrepreneurial talent of the factor.

Because the expenses of the enterprise are the cost of all the elements of the enterprise, including the remuneration that should be paid to the entrepreneur.

Economic Profit = Benefit - Economic Cost (Opportunity Cost).

Upstairs is right. Because the management and supervision of entrepreneurs is also a kind of labor, it should be distributed accordingly. Exists in the form of normal profits.

The opportunity cost is the maximum benefit when capital is used for other purposes, and its main content is the interest on capital, because if it is not invested, it will be put into the bank. Opportunity cost is an economic cost, which is a different concept from normal profit.

Accounting profit is the profit we usually receive, that is, revenue-cost expenses.

Economic profit is the concept of economics, economists believe that accounting profit is overestimated, only considering the cost of the surface of the enterprise, not considering the hidden cost, nor considering the appreciation or depreciation of assets at the end of the period, simply put, economic profit is accounting profit - opportunity cost.

Normal profit should be what we call accounting profit, which refers to the surplus of earnings minus costs.

Economists believe that accounting profit is overestimated, so the concept of opportunity cost is introduced into economics, then economic profit is the remaining accounting profit after subtracting the opportunity cost profit. Wish.