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Opportunity cost influence in profits
#cfa #cfa-level-1 #economics #microeconomics #reading-15-demand-and-supply-analysis-the-firm #subject-1-types-of-profit-measures
The total opportunity costs include both explicit and implicit costs of all the resources used by a firm.
  • Implicit opportunity cost is the unearned or nominal profit that the resource-owner did not make from investing in the next best alternative.

  • You can have a significant accounting profit with little to no economic profit.


Example
Suppose a person uses his own resources, land, capital, and time in the production of goods. The opportunity costs of these resources are shown below:
  • Accounting Profit = $55,000
  • Entrepreneur's own previous salary = $40,000
  • Previous interest on capital = $1,000
  • Previous rent = $2,000
  • Economic Profit = 55,000 - 40,000 - 1,000 - 2,000 = $12,000
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Subject 1. Types of Profit Measures
tal accounting costs Economic profit equals a firm's total revenue minus its total opportunity costs of production. Economic profit = Total revenue - Total opportunity costs <span>The total opportunity costs include both explicit and implicit costs of all the resources used by a firm. Implicit opportunity cost is the unearned or nominal profit that the resource-owner did not make from investing in the next best alternative. As a result, you can have a significant accounting profit with little to no economic profit. Example Suppose a person uses his own resources, land, capital, and time in the production of goods. The opportunity costs of these resources are shown below: Accounting Profit = $55,000 Entrepreneur's own forgone salary = $40,000 Foregone interest on capital = $1,000 Foregone rent = $2,000 Economic Profit = 55,000 - 40,000 - 1,000 - 2,000 = $12,000 For publicly traded corporations, economic profit is accounting profit - required return on equity capital. When economic profit is zero, a firm's acco


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