You will always face far more knowledge that you will be able to master. That is why prioritizing is critical for building quality knowledge in the long-term. The way you prioritize will affect the way your knowledge slots in. This will also affect the speed of learning (e.g. see: learn basics first). There are many stages at which prioritizing will take place; only few are relevant to knowledge representation, but all are important:

1. Prioritizing sources - there will always be a number of sources of your knowledge. If you are still at student years: these will most likely be books and notes pertaining to different subjects. Otherwise you will probably rely more on journals, Internet, TV, newspapers, encyclopedias, dictionaries, etc. It is always worth being aware what is the optimum proportion of time devoted to those varied sources. As you progress with learning, you will quickly develop a good sense of which learning slots bring better results and which might be extended at the cost of others
   
2. Extracting knowledge - unless you are about to pass an important exam, it nearly never makes sense to memorize whole books or whole articles. You will need to extract those parts that are most likely to impact the quality of your knowledge. You can do it by (1) marking paragraphs in a book or journal, (2) pasting relevant web pages to SuperMemo, (3) pasting relevant passages to SuperMemo, (4) typing facts and figures directly to SuperMemo notes, etc. You will need some experience before you can accurately measure how much knowledge you can indeed transfer to your brain and what degree of detail you can feasibly master. Your best way to prioritize the flow of knowledge into your memory is to use incremental reading tools

The candidate should be able to:

1. calculate, interpret, and compare accounting profit, economic profit, normal profit, and economic rent;

2. calculate and interpret and compare total, average, and marginal revenue;

3. describe a firm’s factors of production;

4. calculate and interpret total, average, marginal, fixed, and variable costs;

5. determine and describe breakeven and shutdown points of production;

6. describe approaches to determining the profit-maximizing level of output;

7. describe how economies of scale and diseconomies of scale affect costs;

8. distinguish between short-run and long-run profit maximization;

9. distinguish among decreasing-cost, constant-cost, and increasing-cost industries and describe the long-run supply of each;

10. calculate and interpret total, marginal, and average product of labor;

11. describe the phenomenon of diminishing marginal returns and calculate and interpret the profit-maximizing utilization level of an input;

12. determine the optimal combination of resources that minimizes cost.

By defining profit in general terms as the difference between total revenue and total costs, profit maximization involves the following expression:

Equation (1) 

Π = TR – TC

The economics discipline has its own concept of profit, which differs substantially from what accountants consider profit. There are thus two basic types of profit—accounting and economic—and analysts need to be able to interpret each correctly and to understand how they are related to each other. In the theory of the firm, however, profit without further qualification refers to economic profit.

2.1.1. Accounting Profit

Accounting profit is generally defined as net income reported on the income statement according to standards established by private and public financial oversight bodies that determine the rules for financial reporting. One widely accepted definition of accounting profit—also known as net profit, net income, or net earnings—states that it equals revenue less all accounting (or explicit) costs . Accounting or explicit costs are payments to non-owner parties for services or resources that they supply to the firm. Often referred to as the “bottom line” (the last income figure in the income statement), accounting profit is what is left after paying all accounting costs—whether the expense is a cash outlay or not. When accounting profit is negative, it is called an accounting loss . Equation 2 summarizes the concept of accounting profit:

Equation (2) 

Accounting profit = Total revenue – Total accounting costs

When defining profit as accounting profit, the TC term in Equation 1 becomes total accounting costs, which include only the explicit costs of doing business. Let us consider two businesses: a start-up company and a publicly traded corporation. Suppose that for the start-up, total revenue in the business’s first year is €3,500,000 and total accounting costs are €3,200,000. Accounting profit is €3,500,000 – €3,200,000 = €300,000. The corresponding calculation for the publicly traded corporation, let us suppose, is $50,000,000 – $48,000,000 = $2,000,000. Note that total accounting costs in either case include interest expense—which represents the return required by suppliers of debt capital—because interest expense is an explicit cost.

2.1.2. Economic Profit and Normal Profit

Economic profit (also known as abnormal profit or supernormal profit ) may be defined broadly as accounting profit less the implicit opportunity costs not included in total accounting costs.

Equation (3a) 

Economic profit = Accounting profit – Total implicit opportunity costs

We can define a term, economic cost , equal to the sum of total accounting costs and implicit opportunity costs. Economic profit is therefore equivalently defined as:

Equation (3b) 

Economic profit = Total revenue – Total economic costs

For publicly traded corporations, the focus of investment analysts’ work, the cost of equity capital is the largest and most readily identified implicit opportunity cost omitted in calculating total accounting cost. Consequently, economic profit can be defined for publicly traded corporations as accounting profit less the required return on equity capital.

Examples will make these concepts clearer. Consider the start-up company for which we calculated an accounting profit of €300,000 and suppose that the entrepreneurial executive who launched the start-up took a salary reduction of €100,000 per year relative to the job he left. That €100,000 is an opportunity cost of involving him in running the start-up. Besides labor, financial capital is a resource. Suppose that the executive, as sole owner, makes an investment of €1,500,000 to launch the enterprise and that he might otherwise expect to earn €200,000 per year on that amount in a similar risk investment. Total implicit opportunity costs are €100,000 + €200,000 = €300,000 per year and economic profit is zero: €300,000 – €300,000 = €0. For the publicly traded corporation, we consider the cost of equity capital as the only implicit opportunity cost identifiable. Suppose that equity investment is $18,750,000 and shareholders’ required rate of return is 8 percent so that the dollar cost of equity capital is $1,500,000. Economic profit for the publicly traded corporation is therefore $2,000,000 (accounting profit) less $1,500,000 (cost of equity capital) or $500,000.

For the start-up company, economic profit was zero. Total economic costs were just covered by revenues and the company was not earning a euro more nor less than the amount that meets the opportunity costs of the resources used in the business. Economists would say the company was earning a normal profit (economic profit of zero). In simple terms, normal profit is the level of accounting profit needed to just cover the implicit opportunity costs ignored in accounting costs. For the publicly traded corporation, normal profit was $1,500,000: normal profit can be taken to be the cost of equity capital (in money terms) for such a company or the dollar return required on an equal investment by equity holders in an equivalently risky alternative investment opportunity. The publicly traded corporation actually earned $500,000 in excess of normal profit, which should be reflected in the common shares’ market price.

Thus, the following expression links accounting profit to economic profit and normal profit:

Equation (4) 

Accounting profit = Economic profit + Normal profit

When accounting profit equals normal pr

For the start-up company, economic profit was zero. Total economic costs were just covered by revenues and the company was not earning a euro more nor less than the amount that meets the opportunity costs of the resources used in the business. Economists would say the company was earning a normal profit (economic profit of zero). In simple terms, normal profit is the level of accounting profit needed to just cover the implicit opportunity costs ignored in accounting costs. For the publicly traded corporation, normal profit was $1,500,000: normal profit can be taken to be the cost of equity capital (in money terms) for such a company or the dollar return required on an equal investment by equity holders in an equivalently risky alternative investment opportunity. The publicly traded corporation actually earned $500,000 in excess of normal profit, which should be reflected in the common shares’ market price.

Thus, the following expression links accounting profit to economic profit and normal profit:

Equation (4) 

Accounting profit = Economic profit + Normal profit

When accounting profit equals normal profit, economic profit is zero. Further, when accounting profit is greater than normal profit, economic profit is positive; and when accounting profit is less than normal profit, economic profit is negative (the firm has an economic loss ).

Economic profit for a firm can originate from sources such as:

• competitive advantage;

• exceptional managerial efficiency or skill;

• difficult to copy technology or innovation (e.g., patents, trademarks, and copyrights);

• exclusive access to less-expensive inputs;

• fixed supply of an output, commodity, or resource;

• preferential treatment under governmental policy;

• large increases in demand where supply is unable to respond fully over time;

• exertion of monopoly power (price control) in the market; and

• market barriers to entry that limit competition.

Any of the above factors may lead the firm to have positive net present value investment (NPV) opportunities. Access to positive NPV opportunities and therefore profit in excess of normal profits in the short run may or may not exist in the long run, depending on the potential strength of competition. In highly competitive market situations, firms tend to earn the normal profit level over time because ease of market entry allows for other competing firms to compete away any economic profit over the long run. Economic profit that exists over the long run is usually found where competitive conditions persistently are less than perfect in the market.

Economic profit for a firm can originate from sources such as:

• competitive advantage;

• exceptional managerial efficiency or skill;

• difficult to copy technology or innovation (e.g., patents, trademarks, and copyrights);

• exclusive access to less-expensive inputs;

• fixed supply of an output, commodity, or resource;

• preferential treatment under governmental policy;

• large increases in demand where supply is unable to respond fully over time;

• exertion of monopoly power (price control) in the market; and

• market barriers to entry that limit competition.
  
  Any of the above factors may lead the firm to have positive net present value investment (NPV) opportunities. Access to positive NPV opportunities and therefore profit in excess of normal profits in the short run may or may not exist in the long run, depending on the potential strength of competition. In highly competitive market situations, firms tend to earn the normal profit level over time because ease of market entry allows for other competing firms to compete away any economic profit over the long run. Economic profit that exists over the long run is usually found where competitive conditions persistently are less than perfect in the market.