3.4 Types of Profit

a. Define the different types of profit. b. Explain how firms respond to profit opportunities. c. Calculate a firm’s profit or loss.

• Firms respond to economic profit (loss) rather than accounting profit.
• Accounting profit fails to account for implicit costs (such as cost of financial capital, compensation for risk, or an entrepreneur’s time), which, if fully compensated, result in normal profit.
• Enduring understanding CBA-2: To determine the optimal level at which to pursue an activity whose total benefits exceed total cost, rational economic agents compare marginal benefits and marginal costs.