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20. Prioritize
#rules-of-formulating-knowledge

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
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#citychef #munchery
Muvhery needed to get more production from their chefs, who were constrained by their primary jobs. So Munchery rented space at a shared kitchen and offered it to chefs with the promise that they’d sell their cuisine beyond the physical walls of conventional restaurants. Putting so many chefs together, each running his own business, turned out to be a problem. Tran had to break up constant fights over access to tables and equipment.
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How an immigrant motherfucker made munchery
r started delivering prepared lunches from its chefs to other tech startups to bring in some cash. Customers were fickle. When Munchery didn’t get the boss’s lean grilled chicken breast exactly right, it usually lost the account. <span>Eventually, Tran and Chu, by then his chief technology officer, realized catering was a distraction. They needed to get more production from their chefs, who were constrained by their primary jobs. So Munchery rented space at a shared kitchen and offered it to chefs with the promise that they’d sell their cuisine beyond the physical walls of conventional restaurants. Putting so many chefs together, each running his or her own business, turned out to be a problem. Tran had to break up constant fights over access to tables and equipment. During one confrontation, he remembers, a chef just stared at him while menacingly sharpening a knife. The company kept shifting strategies. It offered a subscription plan for a few meals each week, then pivoted to an a la carte model, where customers could schedule a delive




#citychef #munchery
Munchery’s high fixed costs pose one of the main drags on its business.
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How an immigrant motherfucker made munchery
a few hours a day around din-nertime. The CEOs were “advocating for a way to make this fair for workers but to allow our businesses to operate,” he says. “Every presi-dential candidate is going to have to deal with this subject.” <span>Munchery’s high fixed costs pose one of the main drags on its business. Services such as GrubHub, which connect diners and restaurants online, don’t have significant fixed costs, because the restaurants make the food and in most cases deliver it to customers. Tran and his executives, naturally, pitch Munchery’s expensive infra structure as its biggest advantage. It enables the company to control all of its operating costs, so it




Flashcard 1429057965324

Tags
#sister-miriam-joseph #trivium
Question
The concept is classical, but the term liberal arts and the division of the arts into the trivium and the quadrivium date from the [...]
Answer
Middle Ages

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The concept is classical, but the term liberal arts and the division of the arts into the trivium and the quadrivium date from the Middle Ages

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Flashcard 1429087587596

Tags
#sister-miriam-joseph #trivium
Question
Grammar is an experiment al knowledge of the usages of languages as generally current among poets and prose writers. It is divided into six parts:

(1)
[...];

(2) exposition, according to poetic figures [rhetoric];

(3) ready statement of dialectical peculiarities and allusion;

(4) discovery of etymologies; (5) the accurate account of analogies;

(6) criticism of poetical productions which is the noblest part of grammatical art.
Answer
trained reading with due regard to prosody [versification]

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Grammar is an experiment al knowledge of the usages of languages as generally current among poets and prose writers. It is divided into six parts: (1) trained reading with due regard to prosody [versification]; (2) exposition, according to poetic figures [rhetoric]; (3) ready statement of dialectical peculiarities and allusion; (4) discovery of etymologies; (5) the accurate account of analogi

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#means-of-communication #sister-miriam-joseph #special-or-common #symbols #the-function-of-language #trivium
Special symbols are designed by experts to express with precision ideas in a special field of knowledge, for example: mathematics, chemistry, music
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Special symbols are designed by experts to express with precision ideas in a special field of knowledge, for example: mathematics, chemistry, music. Such special languages are international and do not require translation, for t heir symbols are understood by people of all nationalities in their own language. The multiplication tabl

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Flashcard 1433096031500

Tags
#4-3-the-investment-opportunity-set #cfa #cfa-level-1 #economics #microeconomics #reading-14-demand-and-supply-analysis-consumer-demand #section-5-consumer-equilibrium #study-session-4
Question
This is a constrained (by the resources available to pay for consumption) optimization problem that every consumer must solve: Choose the bundle of goods and services that gets us as [...], while not exceeding our budget.
Answer
high on our ranking as possible

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This is a constrained (by the resources available to pay for consumption) optimization problem that every consumer must solve: Choose the bundle of goods and services that gets us as high on our ranking as possible, while not exceeding our budget.

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5. CONSUMER EQUILIBRIUM: MAXIMIZING UTILITY SUBJECT TO THE BUDGET CONSTRAINT
erful if we could all consume as much of everything as we wanted, but unfortunately, most of us are constrained by income and prices. We now superimpose the budget constraint onto the preference map to model the actual choice of our consumer. <span>This is a constrained (by the resources available to pay for consumption) optimization problem that every consumer must solve: Choose the bundle of goods and services that gets us as high on our ranking as possible, while not exceeding our budget. 5.1. Determining the Consumer’s Equilibrium Bundle of Goods In general, the consumer’s constrained optimization problem consists of maximizing utility,







Flashcard 1434868911372

Tags
#4-3-the-investment-opportunity-set #cfa #cfa-level-1 #economics #has-images #microeconomics #reading-14-demand-and-supply-analysis-consumer-demand #section-5-consumer-equilibrium #study-session-4


Question
The effect of an increase in income on the purchase of bread, an [...] in this example, [...] the consumption of that good.
Answer
inferior good

reduces

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Internal auditing is conducted in diverse legal and cultural environments; for organizations that vary in purpose, size, complexity, and structure; and by persons within or outside the organization. While differences may affect the practice of internal auditing in each environment, conformance with The IIA’s International Standards for the Professional Practice of Internal Auditing (Standards) is essential in meeting the responsibilities of internal auditors and the internal audit activity.
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Flashcard 1435507494156

Question
Internal auditing
Answer
[default - edit me]

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Internal auditing is conducted in diverse legal and cultural environments; for organizations that vary in purpose, size, complexity, and structure; and by persons within or outside the organization. Wh

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Flashcard 1435509067020

Question
[default - edit me]
Answer
is conducted in diverse legal and cultural environments; for organizations that vary in purpose, size, complexity, and structure; and by persons within or outside the organization. While differences may affect the practice of internal auditing in each environment, conformance with The IIA’s International Standards for the Professional Practice of Internal Auditing (Standards) is essential in meeting the responsibilities of internal auditors and the internal audit activity.

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Internal auditing is conducted in diverse legal and cultural environments; for organizations that vary in purpose, size, complexity, and structure; and by persons within or outside the organization. While differences may affect the practice of internal auditing in each environment, conformance with The IIA’s International Standards for the Professional Practice of Internal Auditing (Standards) is essential in meeting the responsibilities of internal auditors and the internal audit activity.

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Flashcard 1435511426316

Tags
#citychef #munchery
Question
Munchery has raised more than [...] in venture capital, and Tran says it’s now the largest single-kitchen pro-ducer of freshly prepared food in the cities where it operates.
Answer
$115 million

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Munchery has served more than 3 million meals since Tran and a friend, Conrad Chu, delivered their first entrees in 2010. The company has raised more than $115 million in venture capital, and Tran says it’s now the largest single-kitchen pro-ducer of freshly prepared food in the cities where it operates.

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How an immigrant motherfucker made munchery
ture level. After they’re prepared, the dishes are chilled in refrigerated rooms, packed in compostable boxes, and loaded into cars for delivery. Customers heat them up for about two minutes in a microwave or 10 to 20 in an oven. <span>Munchery has served more than 3 million meals since Tran and a friend, Conrad Chu, delivered their first entrees in 2010. The company has raised more than $115 million in venture capital, and Tran says it’s now the largest single-kitchen pro-ducer of freshly prepared food in the cities where it operates. He hopes to open in at least 10 more markets in the next few years but is secretive about expansion plans. Like many other startups in the frenzied on-demand economy, Munchery isn’t yet







Article 1435513785612

LEARNING OUTCOMES
#cfa #cfa-level-1 #economics #lol #microeconomics #reading-15-demand-and-supply-analysis-the-firm

The candidate should be able to: calculate, interpret, and compare accounting profit, economic profit, normal profit, and economic rent; calculate and interpret and compare total, average, and marginal revenue; describe a firm’s factors of production; calculate and interpret total, average, marginal, fixed, and variable costs; determine and describe breakeven and shutdown points of production; describe approaches to determining the profit-maximizing level of output; describe how economies of scale and diseconomies of scale affect costs; distinguish between short-run and long-run profit maximization; distinguish among decreasing-cost, constant-cost, and increasing-cost industries and describe the long-run supply of each; calculate and interpret total, marginal, and average product of labor; describe the phenomenon of diminishing marginal returns and calculate and interpret the profit-maximizing utilization level of



#cfa #cfa-level-1 #economics #lol #microeconomics #reading-15-demand-and-supply-analysis-the-firm

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.

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LEARNING OUTCOMES
The candidate should be able to: calculate, interpret, and compare accounting profit, economic profit, normal profit, and economic rent; calculate and interpret and compare total, average, and marginal revenue; describe a firm’s factors of production; calculate and interpret total, average, marginal, fixed, and variable costs; determine and describe breakeven and shutdown points of production; describe approaches to determining the profit-maximizing level of output; describe how economies of scale and diseconomies of scale affect costs; distinguish between short-run and long-run profit maximization; distinguish among decreasing-cost, constant-cost, and increasing-cost industries and describe the long-run supply of each; calculate and interpret total, marginal, and average product of labor; describe the phenomenon of diminishing marginal returns and calculate and interpret the profit-maximizing utilization level of an input; determine the optimal combination of resources that minimizes cost.




Article 1435516669196

1. INTRODUCTION
#cfa #cfa-level-1 #economics #introduction #lol #microeconomics #reading-15-demand-and-supply-analysis-the-firm #study-session-4

In studying decision making by consumers and businesses, microeconomics gives rise to the theory of the consumer and theory of the firm as two branches of study. The theory of the consumer is the study of consumption—the demand for goods and services—by utility-maximizing individuals. The theory of the firm , the subject of this reading, is the study of the supply of goods and services by profit-maximizing firms. Conceptually, profit is the difference between revenue and costs. Revenue is a function of selling price and quantity sold, which are determined by the demand and supply behavior in the markets into which the firm sells/provides its goods or services. Costs are a function of the demand and supply interactions in resource markets, such as markets for labor and for physical inputs. The main focus of this reading is the cost side of the profit equation for companies competing in market economies under perfect competition. A subsequent reading will examine the different types of markets in



Flashcard 1435517979916

Tags
#cfa #cfa-level-1 #economics #introduction #lol #microeconomics #reading-15-demand-and-supply-analysis-the-firm #study-session-4
Question

In studying decision making by consumers and businesses, microeconomics gives rise to the [...] and [...] as two branches of study.

Answer
theory of the consumer

theory of the firm

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1. INTRODUCTION
In studying decision making by consumers and businesses, microeconomics gives rise to the theory of the consumer and theory of the firm as two branches of study. The theory of the consumer is the study of consumption—the demand for goods and services—by utility-maximizing individual







#cfa #cfa-level-1 #economics #introduction #lol #microeconomics #reading-15-demand-and-supply-analysis-the-firm #study-session-4
The theory of the firm , the subject of this reading, is the study of the supply of goods and services by profit-maximizing firms.
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1. INTRODUCTION
icroeconomics gives rise to the theory of the consumer and theory of the firm as two branches of study. The theory of the consumer is the study of consumption—the demand for goods and services—by utility-maximizing individuals. <span>The theory of the firm , the subject of this reading, is the study of the supply of goods and services by profit-maximizing firms. Conceptually, profit is the difference between revenue and costs. Revenue is a function of selling price and quantity sold, which are determined by the demand and supply behavior in the




#cfa #cfa-level-1 #economics #introduction #lol #microeconomics #reading-15-demand-and-supply-analysis-the-firm #study-session-4
Revenue is a function of selling price and quantity sold, which are determined by the demand and supply behavior in the markets into which the firm sells/provides its goods or services.
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1. INTRODUCTION
services—by utility-maximizing individuals. The theory of the firm , the subject of this reading, is the study of the supply of goods and services by profit-maximizing firms. Conceptually, profit is the difference between revenue and costs. <span>Revenue is a function of selling price and quantity sold, which are determined by the demand and supply behavior in the markets into which the firm sells/provides its goods or services. Costs are a function of the demand and supply interactions in resource markets, such as markets for labor and for physical inputs. The main focus of this reading is the cost side of the




#cfa #cfa-level-1 #economics #introduction #lol #microeconomics #reading-15-demand-and-supply-analysis-the-firm #study-session-4
Costs are a function of the demand and supply interactions in resource markets, such as markets for labor and for physical inputs.
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1. INTRODUCTION
lly, profit is the difference between revenue and costs. Revenue is a function of selling price and quantity sold, which are determined by the demand and supply behavior in the markets into which the firm sells/provides its goods or services. <span>Costs are a function of the demand and supply interactions in resource markets, such as markets for labor and for physical inputs. The main focus of this reading is the cost side of the profit equation for companies competing in market economies under perfect competition. A subsequent reading will examine the diffe




#cfa #cfa-level-1 #economics #introduction #lol #microeconomics #reading-15-demand-and-supply-analysis-the-firm #study-session-4
The main focus of this reading is the cost side of the profit equation for companies competing in market economies under perfect competition.
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1. INTRODUCTION
ined by the demand and supply behavior in the markets into which the firm sells/provides its goods or services. Costs are a function of the demand and supply interactions in resource markets, such as markets for labor and for physical inputs. <span>The main focus of this reading is the cost side of the profit equation for companies competing in market economies under perfect competition. A subsequent reading will examine the different types of markets into which a firm may sell its output. The study of the profit-maximizing firm in a single time period is t




Flashcard 1435524533516

Tags
#cfa #cfa-level-1 #economics #introduction #lol #microeconomics #reading-15-demand-and-supply-analysis-the-firm #study-session-4
Question
The theory of the firm is the study of the [...] by [...]
Answer
supply of goods and services by profit-maximizing firms.

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The theory of the firm , the subject of this reading, is the study of the supply of goods and services by profit-maximizing firms.

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1. INTRODUCTION
icroeconomics gives rise to the theory of the consumer and theory of the firm as two branches of study. The theory of the consumer is the study of consumption—the demand for goods and services—by utility-maximizing individuals. <span>The theory of the firm , the subject of this reading, is the study of the supply of goods and services by profit-maximizing firms. Conceptually, profit is the difference between revenue and costs. Revenue is a function of selling price and quantity sold, which are determined by the demand and supply behavior in the







Flashcard 1435526892812

Tags
#cfa #cfa-level-1 #economics #introduction #lol #microeconomics #reading-15-demand-and-supply-analysis-the-firm #study-session-4
Question
selling price and quantity sold are determined by the [...] in the [...] .
Answer
demand and supply behavior

markets where the firm sells

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Revenue is a function of selling price and quantity sold, which are determined by the demand and supply behavior in the markets into which the firm sells/provides its goods or services.

Original toplevel document

1. INTRODUCTION
services—by utility-maximizing individuals. The theory of the firm , the subject of this reading, is the study of the supply of goods and services by profit-maximizing firms. Conceptually, profit is the difference between revenue and costs. <span>Revenue is a function of selling price and quantity sold, which are determined by the demand and supply behavior in the markets into which the firm sells/provides its goods or services. Costs are a function of the demand and supply interactions in resource markets, such as markets for labor and for physical inputs. The main focus of this reading is the cost side of the







Flashcard 1435529252108

Tags
#cfa #cfa-level-1 #economics #introduction #lol #microeconomics #reading-15-demand-and-supply-analysis-the-firm #study-session-4
Question
Costs are a function of the [...] in [...]
Answer
demand and supply interactions in resource markets

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Costs are a function of the demand and supply interactions in resource markets, such as markets for labor and for physical inputs.

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1. INTRODUCTION
lly, profit is the difference between revenue and costs. Revenue is a function of selling price and quantity sold, which are determined by the demand and supply behavior in the markets into which the firm sells/provides its goods or services. <span>Costs are a function of the demand and supply interactions in resource markets, such as markets for labor and for physical inputs. The main focus of this reading is the cost side of the profit equation for companies competing in market economies under perfect competition. A subsequent reading will examine the diffe







Flashcard 1435531611404

Tags
#cfa #cfa-level-1 #economics #introduction #lol #microeconomics #reading-15-demand-and-supply-analysis-the-firm #study-session-4
Question
The main focus of this reading is the [...] equation for companies competing in market economies under [...]
Answer
cost side of the profit

perfect competition.

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The main focus of this reading is the cost side of the profit equation for companies competing in market economies under perfect competition.

Original toplevel document

1. INTRODUCTION
ined by the demand and supply behavior in the markets into which the firm sells/provides its goods or services. Costs are a function of the demand and supply interactions in resource markets, such as markets for labor and for physical inputs. <span>The main focus of this reading is the cost side of the profit equation for companies competing in market economies under perfect competition. A subsequent reading will examine the different types of markets into which a firm may sell its output. The study of the profit-maximizing firm in a single time period is t







#cfa #cfa-level-1 #economics #introduction #lol #microeconomics #reading-15-demand-and-supply-analysis-the-firm #study-session-4
The study of the profit-maximizing firm in a single time period is the essential starting point for the analysis of the economics of corporate decision making.
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1. INTRODUCTION
f this reading is the cost side of the profit equation for companies competing in market economies under perfect competition. A subsequent reading will examine the different types of markets into which a firm may sell its output. <span>The study of the profit-maximizing firm in a single time period is the essential starting point for the analysis of the economics of corporate decision making. Furthermore, with the attention given to earnings by market participants, the insights gained by this study should be practically relevant. Among the questions this reading will address




#cfa #cfa-level-1 #economics #introduction #lol #microeconomics #reading-15-demand-and-supply-analysis-the-firm #study-session-4
This reading is organized as follows:

Section 2 discusses the types of profit measures, including what they have in common, how they differ, and their uses and definitions.

Section 3 covers the revenue and cost inputs of the profit equation and the related topics of breakeven analysis, shutdown point of operation, market entry and exit, cost structures, and scale effects. In addition, the economic outcomes related to a firm’s optimal supply behavior over the short run and long run are presented in this section.
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1. INTRODUCTION
n? How are total, average, and marginal costs distinguished, and how is each related to the firm’s profit? What roles do marginal quantities (selling prices and costs) play in optimization? <span>This reading is organized as follows: Section 2 discusses the types of profit measures, including what they have in common, how they differ, and their uses and definitions. Section 3 covers the revenue and cost inputs of the profit equation and the related topics of breakeven analysis, shutdown point of operation, market entry and exit, cost structures, and scale effects. In addition, the economic outcomes related to a firm’s optimal supply behavior over the short run and long run are presented in this section. A summary and practice problems conclude the reading. <span><body><html>




Flashcard 1435536067852

Tags
#cfa #cfa-level-1 #economics #introduction #lol #microeconomics #reading-15-demand-and-supply-analysis-the-firm #study-session-4
Question
The study of the profit-maximizing firm in [...] is the essential starting point for the analysis of the economics of corporate decision making.
Answer
a single time period

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The study of the profit-maximizing firm in a single time period is the essential starting point for the analysis of the economics of corporate decision making.

Original toplevel document

1. INTRODUCTION
f this reading is the cost side of the profit equation for companies competing in market economies under perfect competition. A subsequent reading will examine the different types of markets into which a firm may sell its output. <span>The study of the profit-maximizing firm in a single time period is the essential starting point for the analysis of the economics of corporate decision making. Furthermore, with the attention given to earnings by market participants, the insights gained by this study should be practically relevant. Among the questions this reading will address







Flashcard 1435538427148

Tags
#cfa #cfa-level-1 #economics #introduction #lol #microeconomics #reading-15-demand-and-supply-analysis-the-firm #study-session-4
Question
This reading is organized as follows:

Section 2 discusses the [...], including what they have in common, how they differ, and their uses and definitions.

Section 3 covers the revenue and cost inputs of the profit equation and the related topics of breakeven analysis, shutdown point of operation, market entry and exit, cost structures, and scale effects. In addition, the economic outcomes related to a firm’s optimal supply behavior over the short run and long run are presented in this section.
Answer
types of profit measures

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This reading is organized as follows: Section 2 discusses the types of profit measures, including what they have in common, how they differ, and their uses and definitions. Section 3 covers the revenue and cost inputs of the profit equation and the related to

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1. INTRODUCTION
n? How are total, average, and marginal costs distinguished, and how is each related to the firm’s profit? What roles do marginal quantities (selling prices and costs) play in optimization? <span>This reading is organized as follows: Section 2 discusses the types of profit measures, including what they have in common, how they differ, and their uses and definitions. Section 3 covers the revenue and cost inputs of the profit equation and the related topics of breakeven analysis, shutdown point of operation, market entry and exit, cost structures, and scale effects. In addition, the economic outcomes related to a firm’s optimal supply behavior over the short run and long run are presented in this section. A summary and practice problems conclude the reading. <span><body><html>







Article 1435540000012

2. OBJECTIVES OF THE FIRM
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This reading assumes that the objective of the firm is to maximize profit over the period ahead. Such analysis provides both tools (e.g., optimization) and concepts (e.g., productivity) that can be adapted to more-complex cases and also provides a set of results that may offer useful approximations in practice. The price at which a given quantity of a good can be bought or sold is assumed to be known with certainty (i.e., the theory of the firm under conditions of certainty). The main contrast of this type of analysis is to the theory of the firm under conditions of uncertainty, where prices, and therefore profit, are uncertain. Under market uncertainty, a range of possible profit outcomes is associated with the firm’s decision to produce a given quantity of goods or services over a specific time period. Such complex theory typically makes simplifying assumptions. When managers of for-profit companies have been surveyed about the objectives of the companies they direct, researchers have often conclu



#cfa #cfa-level-1 #economics #lol #microeconomics #reading-15-demand-and-supply-analysis-the-firm #section-2-objectives-of-the-firm #study-session-4
This reading assumes that the objective of the firm is to maximize profit over the period ahead
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2. OBJECTIVES OF THE FIRM
This reading assumes that the objective of the firm is to maximize profit over the period ahead. Such analysis provides both tools (e.g., optimization) and concepts (e.g., productivity) that can be adapted to more-complex cases and also provides a set of results that may offer use




Flashcard 1435542359308

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Question
This reading assumes that the objective of the firm is to maximize profit over [...]
Answer
the period ahead

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This reading assumes that the objective of the firm is to maximize profit over the period ahead

Original toplevel document

2. OBJECTIVES OF THE FIRM
This reading assumes that the objective of the firm is to maximize profit over the period ahead. Such analysis provides both tools (e.g., optimization) and concepts (e.g., productivity) that can be adapted to more-complex cases and also provides a set of results that may offer use







#cfa #cfa-level-1 #economics #lol #microeconomics #reading-15-demand-and-supply-analysis-the-firm #section-2-objectives-of-the-firm #study-session-4
The price at which a given quantity of a good can be bought or sold is assumed to be known with certainty (i.e., the theory of the firm under conditions of certainty)
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2. OBJECTIVES OF THE FIRM
fit over the period ahead. Such analysis provides both tools (e.g., optimization) and concepts (e.g., productivity) that can be adapted to more-complex cases and also provides a set of results that may offer useful approximations in practice. <span>The price at which a given quantity of a good can be bought or sold is assumed to be known with certainty (i.e., the theory of the firm under conditions of certainty). The main contrast of this type of analysis is to the theory of the firm under conditions of uncertainty, where prices, and therefore profit, are uncertain. Under market uncertainty, a




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The main contrast of this type of analysis is to the theory of the firm under conditions of uncertainty, where prices, and therefore profit, are uncertain.
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2. OBJECTIVES OF THE FIRM
rovides a set of results that may offer useful approximations in practice. The price at which a given quantity of a good can be bought or sold is assumed to be known with certainty (i.e., the theory of the firm under conditions of certainty). <span>The main contrast of this type of analysis is to the theory of the firm under conditions of uncertainty, where prices, and therefore profit, are uncertain. Under market uncertainty, a range of possible profit outcomes is associated with the firm’s decision to produce a given quantity of goods or services over a specific time period. Such c




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When managers of for-profit companies have been surveyed about the objectives of the companies they direct, researchers have often concluded that

a) companies frequently have multiple objectives;

b) objectives can often be classified as focused on profitability (e.g., maximizing profits, increasing market share) or on controlling risk (e.g., survival, stable earnings growth);

c) managers in different countries may have different emphases.
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2. OBJECTIVES OF THE FIRM
be known with certainty (i.e., the theory of the firm under conditions of certainty). The main contrast of this type of analysis is to the theory of the firm under conditions of uncertainty, where prices, and therefore profit, are uncertain. <span>Under market uncertainty, a range of possible profit outcomes is associated with the firm’s decision to produce a given quantity of goods or services over a specific time period. Such complex theory typically makes simplifying assumptions. When managers of for-profit companies have been surveyed about the objectives of the companies they direct, researchers have often concluded that a) companies frequently have multiple objectives; b) objectives can often be classified as focused on profitability (e.g., maximizing profits, increasing market share) or on controlling risk (e.g., survival, stable earnings growth); and c) managers in different countries may have different emphases. Finance experts frequently reconcile profitability and risk objectives by stating that the objective of the firm is, or should be, shareholder wealth maximization (i.e.,




Flashcard 1435547864332

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#cfa #cfa-level-1 #economics #lol #microeconomics #reading-15-demand-and-supply-analysis-the-firm #section-2-objectives-of-the-firm #study-session-4
Question
Under market uncertainty, a range of possible [...] is associated with the firm’s decision to produce a given quantity of goods or services over a specific time period. Such complex theory typically makes simplifying assumptions.
Answer
profit outcomes

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Under market uncertainty, a range of possible profit outcomes is associated with the firm’s decision to produce a given quantity of goods or services over a specific time period. Such complex theory typically makes simplifying assumptions.&#1

Original toplevel document

2. OBJECTIVES OF THE FIRM
be known with certainty (i.e., the theory of the firm under conditions of certainty). The main contrast of this type of analysis is to the theory of the firm under conditions of uncertainty, where prices, and therefore profit, are uncertain. <span>Under market uncertainty, a range of possible profit outcomes is associated with the firm’s decision to produce a given quantity of goods or services over a specific time period. Such complex theory typically makes simplifying assumptions. When managers of for-profit companies have been surveyed about the objectives of the companies they direct, researchers have often concluded that a) companies frequently have multiple objectives; b) objectives can often be classified as focused on profitability (e.g., maximizing profits, increasing market share) or on controlling risk (e.g., survival, stable earnings growth); and c) managers in different countries may have different emphases. Finance experts frequently reconcile profitability and risk objectives by stating that the objective of the firm is, or should be, shareholder wealth maximization (i.e.,







Flashcard 1435551796492

Tags
#cfa #cfa-level-1 #economics #lol #microeconomics #reading-15-demand-and-supply-analysis-the-firm #section-2-objectives-of-the-firm #study-session-4
Question

When managers of for-profit companies have been surveyed about the objectives of the companies they direct, researchers have often concluded that

a) companies frequently have [...]

Answer
multiple objectives;

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When managers of for-profit companies have been surveyed about the objectives of the companies they direct, researchers have often concluded that a) companies frequently have multiple objectives; b) objectives can often be classified as focused on profitability (e.g., maximizing profits, increasing market share) or on controlling risk (e.g., survival, stable earnings

Original toplevel document

2. OBJECTIVES OF THE FIRM
be known with certainty (i.e., the theory of the firm under conditions of certainty). The main contrast of this type of analysis is to the theory of the firm under conditions of uncertainty, where prices, and therefore profit, are uncertain. <span>Under market uncertainty, a range of possible profit outcomes is associated with the firm’s decision to produce a given quantity of goods or services over a specific time period. Such complex theory typically makes simplifying assumptions. When managers of for-profit companies have been surveyed about the objectives of the companies they direct, researchers have often concluded that a) companies frequently have multiple objectives; b) objectives can often be classified as focused on profitability (e.g., maximizing profits, increasing market share) or on controlling risk (e.g., survival, stable earnings growth); and c) managers in different countries may have different emphases. Finance experts frequently reconcile profitability and risk objectives by stating that the objective of the firm is, or should be, shareholder wealth maximization (i.e.,







Flashcard 1435553369356

Tags
#cfa #cfa-level-1 #economics #lol #microeconomics #reading-15-demand-and-supply-analysis-the-firm #section-2-objectives-of-the-firm #study-session-4
Question
In the theory of the firm, the price at which a given quantity of a good can be bought or sold is assumed to [...]
Answer
be known with certainty

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The price at which a given quantity of a good can be bought or sold is assumed to be known with certainty (i.e., the theory of the firm under conditions of certainty)

Original toplevel document

2. OBJECTIVES OF THE FIRM
fit over the period ahead. Such analysis provides both tools (e.g., optimization) and concepts (e.g., productivity) that can be adapted to more-complex cases and also provides a set of results that may offer useful approximations in practice. <span>The price at which a given quantity of a good can be bought or sold is assumed to be known with certainty (i.e., the theory of the firm under conditions of certainty). The main contrast of this type of analysis is to the theory of the firm under conditions of uncertainty, where prices, and therefore profit, are uncertain. Under market uncertainty, a







#cfa #cfa-level-1 #economics #lol #microeconomics #reading-15-demand-and-supply-analysis-the-firm #section-2-objectives-of-the-firm #study-session-4
Finance experts frequently reconcile profitability and risk objectives by stating that the objective of the firm is, or should be, shareholder wealth maximization (i.e., to maximize the market value of shareholders’ equity)
statusnot read reprioritisations
last reprioritisation on reading queue position [%]
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2. OBJECTIVES OF THE FIRM
en be classified as focused on profitability (e.g., maximizing profits, increasing market share) or on controlling risk (e.g., survival, stable earnings growth); and c) managers in different countries may have different emphases. <span>Finance experts frequently reconcile profitability and risk objectives by stating that the objective of the firm is, or should be, shareholder wealth maximization (i.e., to maximize the market value of shareholders’ equity). This theory states that firms try, or should try, to increase the wealth of their owners (shareholders) and that market prices balance returns against risk. However, complex corporate




#cfa #cfa-level-1 #economics #lol #microeconomics #reading-15-demand-and-supply-analysis-the-firm #section-2-objectives-of-the-firm #study-session-4
Many analysts view profitability as the single most important measure of business performance.
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2. OBJECTIVES OF THE FIRM
f shareholders’ equity). This theory states that firms try, or should try, to increase the wealth of their owners (shareholders) and that market prices balance returns against risk. However, complex corporate objectives may exist in practice. <span>Many analysts view profitability as the single most important measure of business performance. Without profit, the business eventually fails; with profit, the business can survive, compete, and prosper. The question is: What is profit? Economists, accountants, investors, financia




#cfa #cfa-level-1 #economics #lol #microeconomics #reading-15-demand-and-supply-analysis-the-firm #section-2-objectives-of-the-firm #study-session-4
Without profit, the business eventually fails; with profit, the business can survive, compete, and prosper. The question is: What is profit? Economists, accountants, investors, financial analysts, and regulators view profit from different perspectives. The starting point for anyone who is doing profit analysis is to have a solid grasp of how various forms of profit are defined and how to interpret the profit based on these different definitions.
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2. OBJECTIVES OF THE FIRM
th of their owners (shareholders) and that market prices balance returns against risk. However, complex corporate objectives may exist in practice. Many analysts view profitability as the single most important measure of business performance. <span>Without profit, the business eventually fails; with profit, the business can survive, compete, and prosper. The question is: What is profit? Economists, accountants, investors, financial analysts, and regulators view profit from different perspectives. The starting point for anyone who is doing profit analysis is to have a solid grasp of how various forms of profit are defined and how to interpret the profit based on these different definitions. By defining profit in general terms as the difference between total revenue and total costs, profit maximization involves the following expression: Equation (1




#cfa #cfa-level-1 #economics #lol #microeconomics #reading-15-demand-and-supply-analysis-the-firm #section-2-objectives-of-the-firm #study-session-4

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

Equation (1) 

Π = TRTC

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2. OBJECTIVES OF THE FIRM
fit from different perspectives. The starting point for anyone who is doing profit analysis is to have a solid grasp of how various forms of profit are defined and how to interpret the profit based on these different definitions. <span>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 where Π is profit, TR is total revenue, and TC is total costs. TC can be defined as accounting costs or economic costs, depending on the objectives and requirements of the




#cfa #cfa-level-1 #economics #lol #microeconomics #reading-15-demand-and-supply-analysis-the-firm #section-2-objectives-of-the-firm #study-session-4
TC can be defined as accounting costs or economic costs, depending on the objectives and requirements of the analyst for evaluating profit.
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2. OBJECTIVES OF THE FIRM
ms as the difference between total revenue and total costs, profit maximization involves the following expression: Equation (1)  Π = TR – TC where Π is profit, TR is total revenue, and TC is total costs. <span>TC can be defined as accounting costs or economic costs, depending on the objectives and requirements of the analyst for evaluating profit. The characteristics of the product market, where the firm sells its output or services, and of the resource market, where the firm purchases resources, play an important role in the det




#cfa #cfa-level-1 #economics #lol #microeconomics #reading-15-demand-and-supply-analysis-the-firm #section-2-objectives-of-the-firm #study-session-4
The characteristics of the product market, where the firm sells its output or services, and of the resource market, where the firm purchases resources, play an important role in the determination of profit.
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2. OBJECTIVES OF THE FIRM
  Π = TR – TC where Π is profit, TR is total revenue, and TC is total costs. TC can be defined as accounting costs or economic costs, depending on the objectives and requirements of the analyst for evaluating profit. <span>The characteristics of the product market, where the firm sells its output or services, and of the resource market, where the firm purchases resources, play an important role in the determination of profit. Key variables that determine TC are the level of output, the firm’s efficiency in producing that level of output when utilizing inputs, and resource prices as established by resource ma




#cfa #cfa-level-1 #economics #lol #microeconomics #reading-15-demand-and-supply-analysis-the-firm #section-2-objectives-of-the-firm #study-session-4
Key variables that determine TC are the level of output, the firm’s efficiency in producing that level of output when utilizing inputs, and resource prices as established by resource markets.
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2. OBJECTIVES OF THE FIRM
the analyst for evaluating profit. The characteristics of the product market, where the firm sells its output or services, and of the resource market, where the firm purchases resources, play an important role in the determination of profit. <span>Key variables that determine TC are the level of output, the firm’s efficiency in producing that level of output when utilizing inputs, and resource prices as established by resource markets. TR is a function of output and product price as determined by the firm’s product market. 2.1. Types of Profit Measures The economics discipline has its




#cfa #cfa-level-1 #economics #lol #microeconomics #reading-15-demand-and-supply-analysis-the-firm #section-2-objectives-of-the-firm #study-session-4
TR is a function of output and product price as determined by the firm’s product market.
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2. OBJECTIVES OF THE FIRM
an important role in the determination of profit. Key variables that determine TC are the level of output, the firm’s efficiency in producing that level of output when utilizing inputs, and resource prices as established by resource markets. <span>TR is a function of output and product price as determined by the firm’s product market. 2.1. Types of Profit Measures The economics discipline has its own concept of profit, which differs substantially from what accountants consider profit.




Flashcard 1435564641548

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#cfa #cfa-level-1 #economics #lol #microeconomics #reading-15-demand-and-supply-analysis-the-firm #section-2-objectives-of-the-firm #study-session-4
Question
Finance experts frequently reconcile profitability and risk objectives by stating that the objective of the firm is, or should be, [...]
Answer
shareholder wealth maximization (i.e., to maximize the market value of shareholders’ equity)

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Finance experts frequently reconcile profitability and risk objectives by stating that the objective of the firm is, or should be, shareholder wealth maximization (i.e., to maximize the market value of shareholders’ equity)

Original toplevel document

2. OBJECTIVES OF THE FIRM
en be classified as focused on profitability (e.g., maximizing profits, increasing market share) or on controlling risk (e.g., survival, stable earnings growth); and c) managers in different countries may have different emphases. <span>Finance experts frequently reconcile profitability and risk objectives by stating that the objective of the firm is, or should be, shareholder wealth maximization (i.e., to maximize the market value of shareholders’ equity). This theory states that firms try, or should try, to increase the wealth of their owners (shareholders) and that market prices balance returns against risk. However, complex corporate







Flashcard 1435566214412

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#cfa #cfa-level-1 #economics #lol #microeconomics #reading-15-demand-and-supply-analysis-the-firm #section-2-objectives-of-the-firm #study-session-4
Question
Many analysts view [...] as the single most important measure of business performance.
Answer
profitability

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Many analysts view profitability as the single most important measure of business performance.

Original toplevel document

2. OBJECTIVES OF THE FIRM
f shareholders’ equity). This theory states that firms try, or should try, to increase the wealth of their owners (shareholders) and that market prices balance returns against risk. However, complex corporate objectives may exist in practice. <span>Many analysts view profitability as the single most important measure of business performance. Without profit, the business eventually fails; with profit, the business can survive, compete, and prosper. The question is: What is profit? Economists, accountants, investors, financia







Flashcard 1435567787276

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#cfa #cfa-level-1 #economics #lol #microeconomics #reading-15-demand-and-supply-analysis-the-firm #section-2-objectives-of-the-firm #study-session-4
Question

By defining profit in general terms as [...], profit maximization involves the following expression:

Equation (1) 

Π = [...]

Answer
the difference between total revenue and total costs

TRTC

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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

Original toplevel document

2. OBJECTIVES OF THE FIRM
fit from different perspectives. The starting point for anyone who is doing profit analysis is to have a solid grasp of how various forms of profit are defined and how to interpret the profit based on these different definitions. <span>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 where Π is profit, TR is total revenue, and TC is total costs. TC can be defined as accounting costs or economic costs, depending on the objectives and requirements of the







Flashcard 1435570146572

Tags
#cfa #cfa-level-1 #economics #lol #microeconomics #reading-15-demand-and-supply-analysis-the-firm #section-2-objectives-of-the-firm #study-session-4
Question
TC can be defined as [...] or [...] , depending on the objectives and requirements of the analyst for evaluating profit.
Answer
accounting costs

economic costs

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TC can be defined as accounting costs or economic costs, depending on the objectives and requirements of the analyst for evaluating profit.

Original toplevel document

2. OBJECTIVES OF THE FIRM
ms as the difference between total revenue and total costs, profit maximization involves the following expression: Equation (1)  Π = TR – TC where Π is profit, TR is total revenue, and TC is total costs. <span>TC can be defined as accounting costs or economic costs, depending on the objectives and requirements of the analyst for evaluating profit. The characteristics of the product market, where the firm sells its output or services, and of the resource market, where the firm purchases resources, play an important role in the det







Flashcard 1435572505868

Tags
#cfa #cfa-level-1 #economics #lol #microeconomics #reading-15-demand-and-supply-analysis-the-firm #section-2-objectives-of-the-firm #study-session-4
Question
The characteristics of the [...] market and of the [...] market, play an important role in the determination of profit.
Answer
product

resource

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The characteristics of the product market, where the firm sells its output or services, and of the resource market, where the firm purchases resources, play an important role in the determination of profit.

Original toplevel document

2. OBJECTIVES OF THE FIRM
  Π = TR – TC where Π is profit, TR is total revenue, and TC is total costs. TC can be defined as accounting costs or economic costs, depending on the objectives and requirements of the analyst for evaluating profit. <span>The characteristics of the product market, where the firm sells its output or services, and of the resource market, where the firm purchases resources, play an important role in the determination of profit. Key variables that determine TC are the level of output, the firm’s efficiency in producing that level of output when utilizing inputs, and resource prices as established by resource ma







Flashcard 1435574865164

Tags
#cfa #cfa-level-1 #economics #lol #microeconomics #reading-15-demand-and-supply-analysis-the-firm #section-2-objectives-of-the-firm #study-session-4
Question
Key variables that determine TC are the level of output, the firm’s [...] when utilizing inputs, and resource prices as established by resource markets.
Answer
efficiency in producing that level of output

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Key variables that determine TC are the level of output, the firm’s efficiency in producing that level of output when utilizing inputs, and resource prices as established by resource markets.

Original toplevel document

2. OBJECTIVES OF THE FIRM
the analyst for evaluating profit. The characteristics of the product market, where the firm sells its output or services, and of the resource market, where the firm purchases resources, play an important role in the determination of profit. <span>Key variables that determine TC are the level of output, the firm’s efficiency in producing that level of output when utilizing inputs, and resource prices as established by resource markets. TR is a function of output and product price as determined by the firm’s product market. 2.1. Types of Profit Measures The economics discipline has its







Flashcard 1435577224460

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#cfa #cfa-level-1 #economics #lol #microeconomics #reading-15-demand-and-supply-analysis-the-firm #section-2-objectives-of-the-firm #study-session-4
Question

TR is a function of [...] and [...] as determined by the firm’s product market.

Answer
output

product price

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TR is a function of output and product price as determined by the firm’s product market.

Original toplevel document

2. OBJECTIVES OF THE FIRM
an important role in the determination of profit. Key variables that determine TC are the level of output, the firm’s efficiency in producing that level of output when utilizing inputs, and resource prices as established by resource markets. <span>TR is a function of output and product price as determined by the firm’s product market. 2.1. Types of Profit Measures The economics discipline has its own concept of profit, which differs substantially from what accountants consider profit.







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2.1. Types of Profit Measures

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.

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2. OBJECTIVES OF THE FIRM
he firm’s efficiency in producing that level of output when utilizing inputs, and resource prices as established by resource markets. TR is a function of output and product price as determined by the firm’s product market. <span>2.1. Types of Profit Measures 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 acc




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There are thus two basic types of profit—accounting and economic
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2.1. Types of Profit Measures 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 r

Original toplevel document

2. OBJECTIVES OF THE FIRM
he firm’s efficiency in producing that level of output when utilizing inputs, and resource prices as established by resource markets. TR is a function of output and product price as determined by the firm’s product market. <span>2.1. Types of Profit Measures 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 acc




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In the theory of the firm, however, profit without further qualification refers to economic profit.
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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. <span>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 an

Original toplevel document

2. OBJECTIVES OF THE FIRM
he firm’s efficiency in producing that level of output when utilizing inputs, and resource prices as established by resource markets. TR is a function of output and product price as determined by the firm’s product market. <span>2.1. Types of Profit Measures 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 acc




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Question
There are thus two basic types of profit—[...]
Answer
accounting and economic

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There are thus two basic types of profit—accounting and economic

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2. OBJECTIVES OF THE FIRM
he firm’s efficiency in producing that level of output when utilizing inputs, and resource prices as established by resource markets. TR is a function of output and product price as determined by the firm’s product market. <span>2.1. Types of Profit Measures 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 acc







Flashcard 1435585875212

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#2-1-types-of-profit-measures #cfa #cfa-level-1 #economics #microeconomics #reading-15-demand-and-supply-analysis-the-firm #section-2-objectives-of-the-firm #study-session-4
Question
In the theory of the firm profit without further qualification refers to [...]
Answer
economic profit.

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In the theory of the firm, however, profit without further qualification refers to economic profit.

Original toplevel document

2. OBJECTIVES OF THE FIRM
he firm’s efficiency in producing that level of output when utilizing inputs, and resource prices as established by resource markets. TR is a function of output and product price as determined by the firm’s product market. <span>2.1. Types of Profit Measures 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 acc







#2-1-types-of-profit-measures #cfa #cfa-level-1 #economics #microeconomics #reading-15-demand-and-supply-analysis-the-firm #section-2-objectives-of-the-firm #study-session-4
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.
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o 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 <span>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 . Account

Original toplevel document

2. OBJECTIVES OF THE FIRM
he firm’s efficiency in producing that level of output when utilizing inputs, and resource prices as established by resource markets. TR is a function of output and product price as determined by the firm’s product market. <span>2.1. Types of Profit Measures 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 acc




#2-1-types-of-profit-measures #cfa #cfa-level-1 #economics #microeconomics #reading-15-demand-and-supply-analysis-the-firm #section-2-objectives-of-the-firm #study-session-4
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 .
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ng 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. <span>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

Original toplevel document

2. OBJECTIVES OF THE FIRM
he firm’s efficiency in producing that level of output when utilizing inputs, and resource prices as established by resource markets. TR is a function of output and product price as determined by the firm’s product market. <span>2.1. Types of Profit Measures 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 acc




#2-1-types-of-profit-measures #cfa #cfa-level-1 #economics #microeconomics #reading-15-demand-and-supply-analysis-the-firm #section-2-objectives-of-the-firm #study-session-4
Accounting or explicit costs are payments to non-owner parties for services or resources that they supply to the firm.
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ersight 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 . <span>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 cas

Original toplevel document

2. OBJECTIVES OF THE FIRM
he firm’s efficiency in producing that level of output when utilizing inputs, and resource prices as established by resource markets. TR is a function of output and product price as determined by the firm’s product market. <span>2.1. Types of Profit Measures 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 acc




#2-1-types-of-profit-measures #cfa #cfa-level-1 #economics #microeconomics #reading-15-demand-and-supply-analysis-the-firm #section-2-objectives-of-the-firm #study-session-4
accounting profit is what is left after paying all accounting costs—whether the expense is a cash outlay or not.
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l 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), <span>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 =

Original toplevel document

2. OBJECTIVES OF THE FIRM
he firm’s efficiency in producing that level of output when utilizing inputs, and resource prices as established by resource markets. TR is a function of output and product price as determined by the firm’s product market. <span>2.1. Types of Profit Measures 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 acc




#2-1-types-of-profit-measures #cfa #cfa-level-1 #economics #microeconomics #reading-15-demand-and-supply-analysis-the-firm #section-2-objectives-of-the-firm #study-session-4
When accounting profit is negative, it is called an accounting loss
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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. <span>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 p

Original toplevel document

2. OBJECTIVES OF THE FIRM
he firm’s efficiency in producing that level of output when utilizing inputs, and resource prices as established by resource markets. TR is a function of output and product price as determined by the firm’s product market. <span>2.1. Types of Profit Measures 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 acc




#2-1-types-of-profit-measures #cfa #cfa-level-1 #economics #microeconomics #reading-15-demand-and-supply-analysis-the-firm #section-2-objectives-of-the-firm #study-session-4
Accounting profit = Total revenue – Total accounting costs
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ter 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)  <span>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 conside

Original toplevel document

2. OBJECTIVES OF THE FIRM
he firm’s efficiency in producing that level of output when utilizing inputs, and resource prices as established by resource markets. TR is a function of output and product price as determined by the firm’s product market. <span>2.1. Types of Profit Measures 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 acc




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Question
[...] is generally defined as net income reported on the income statement according to certain standards.

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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 fina

Original toplevel document

2. OBJECTIVES OF THE FIRM
he firm’s efficiency in producing that level of output when utilizing inputs, and resource prices as established by resource markets. TR is a function of output and product price as determined by the firm’s product market. <span>2.1. Types of Profit Measures 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 acc







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Question
One widely accepted definition of accounting profit states that it equals revenue less all [...] or [...]
Answer

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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 .

Original toplevel document

2. OBJECTIVES OF THE FIRM
he firm’s efficiency in producing that level of output when utilizing inputs, and resource prices as established by resource markets. TR is a function of output and product price as determined by the firm’s product market. <span>2.1. Types of Profit Measures 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 acc







Flashcard 1435598458124

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Question
Accounting or explicit costs are [...] to [...] parties for [...] supplied to the firm.
Answer
payments to non-owner

services or resources

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Accounting or explicit costs are payments to non-owner parties for services or resources that they supply to the firm.

Original toplevel document

2. OBJECTIVES OF THE FIRM
he firm’s efficiency in producing that level of output when utilizing inputs, and resource prices as established by resource markets. TR is a function of output and product price as determined by the firm’s product market. <span>2.1. Types of Profit Measures 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 acc







Flashcard 1435602390284

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Question
When accounting profit is negative, it is called an [...]

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When accounting profit is negative, it is called an accounting loss

Original toplevel document

2. OBJECTIVES OF THE FIRM
he firm’s efficiency in producing that level of output when utilizing inputs, and resource prices as established by resource markets. TR is a function of output and product price as determined by the firm’s product market. <span>2.1. Types of Profit Measures 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 acc







Flashcard 1435603963148

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Question
Accounting profit = [...] – Total accounting costs
Answer
Total revenue

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Accounting profit = Total revenue – Total accounting costs

Original toplevel document

2. OBJECTIVES OF THE FIRM
he firm’s efficiency in producing that level of output when utilizing inputs, and resource prices as established by resource markets. TR is a function of output and product price as determined by the firm’s product market. <span>2.1. Types of Profit Measures 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 acc







#2-1-types-of-profit-measures #cfa #cfa-level-1 #economics #microeconomics #reading-15-demand-and-supply-analysis-the-firm #section-2-objectives-of-the-firm #study-session-4
accounting costs include only the explicit costs of doing business.
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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 <span>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 a

Original toplevel document

2. OBJECTIVES OF THE FIRM
he firm’s efficiency in producing that level of output when utilizing inputs, and resource prices as established by resource markets. TR is a function of output and product price as determined by the firm’s product market. <span>2.1. Types of Profit Measures 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 acc




Accounting vs economic profit
#2-1-types-of-profit-measures #cfa #cfa-level-1 #economics #microeconomics #reading-15-demand-and-supply-analysis-the-firm #section-2-objectives-of-the-firm #study-session-4
Let us consider two businesses: a start-up company and a publicly traded corporation.

Start-up's 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, 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.
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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. <span>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. <span><body><html>

Original toplevel document

2. OBJECTIVES OF THE FIRM
he firm’s efficiency in producing that level of output when utilizing inputs, and resource prices as established by resource markets. TR is a function of output and product price as determined by the firm’s product market. <span>2.1. Types of Profit Measures 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 acc




Flashcard 1435609730316

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#2-1-types-of-profit-measures #cfa #cfa-level-1 #economics #microeconomics #reading-15-demand-and-supply-analysis-the-firm #section-2-objectives-of-the-firm #study-session-4
Question
Interest expense—which represents the return required by suppliers of debt capital— is an [...] cost.
Answer
explicit

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ded corporation, 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 <span>explicit cost.<span><body><html>

Original toplevel document

2. OBJECTIVES OF THE FIRM
he firm’s efficiency in producing that level of output when utilizing inputs, and resource prices as established by resource markets. TR is a function of output and product price as determined by the firm’s product market. <span>2.1. Types of Profit Measures 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 acc







Flashcard 1435612089612

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#2-1-types-of-profit-measures #cfa #cfa-level-1 #economics #microeconomics #reading-15-demand-and-supply-analysis-the-firm #section-2-objectives-of-the-firm #study-session-4
Question
accounting costs include only the [...] of doing business.
Answer
explicit costs

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Open it
accounting costs include only the explicit costs of doing business.

Original toplevel document

2. OBJECTIVES OF THE FIRM
he firm’s efficiency in producing that level of output when utilizing inputs, and resource prices as established by resource markets. TR is a function of output and product price as determined by the firm’s product market. <span>2.1. Types of Profit Measures 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 acc







#cfa #cfa-level-1 #economic-and-normal-profit #economics #microeconomics #reading-15-demand-and-supply-analysis-the-firm #section-2-objectives-of-the-firm #study-session-4

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

...
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2. OBJECTIVES OF THE FIRM
00 – $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. <span>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 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. 2.1.3. Economic Rent The surplus value known as economic rent results when a particular resource or good is fixed in supply (with a vertical su




#cfa #cfa-level-1 #economic-and-normal-profit #economics #microeconomics #reading-15-demand-and-supply-analysis-the-firm #section-2-objectives-of-the-firm #study-session-4
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.
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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 to

Original toplevel document

2. OBJECTIVES OF THE FIRM
00 – $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. <span>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 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. 2.1.3. Economic Rent The surplus value known as economic rent results when a particular resource or good is fixed in supply (with a vertical su




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Economic profit = Accounting profit – Total implicit opportunity costs
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13; 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)  <span>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:

Original toplevel document

2. OBJECTIVES OF THE FIRM
00 – $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. <span>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 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. 2.1.3. Economic Rent The surplus value known as economic rent results when a particular resource or good is fixed in supply (with a vertical su




#cfa #cfa-level-1 #economic-and-normal-profit #economics #microeconomics #reading-15-demand-and-supply-analysis-the-firm #section-2-objectives-of-the-firm #study-session-4
We can define a term, economic cost , equal to the sum of total accounting costs and implicit opportunity costs.
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y 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 <span>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 co

Original toplevel document

2. OBJECTIVES OF THE FIRM
00 – $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. <span>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 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. 2.1.3. Economic Rent The surplus value known as economic rent results when a particular resource or good is fixed in supply (with a vertical su




Flashcard 1435618643212

Question
What is the most importan muscle for respiration?
Answer
Diafragma

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Flashcard 1435622837516

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#cfa #cfa-level-1 #economic-and-normal-profit #economics #microeconomics #reading-15-demand-and-supply-analysis-the-firm #section-2-objectives-of-the-firm #study-session-4
Question
We can define a term, [...] , equal to the sum of total accounting costs and implicit opportunity costs.
Answer

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We can define a term, economic cost , equal to the sum of total accounting costs and implicit opportunity costs.

Original toplevel document

2. OBJECTIVES OF THE FIRM
00 – $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. <span>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 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. 2.1.3. Economic Rent The surplus value known as economic rent results when a particular resource or good is fixed in supply (with a vertical su







Flashcard 1435624410380

Tags
#cfa #cfa-level-1 #economic-and-normal-profit #economics #microeconomics #reading-15-demand-and-supply-analysis-the-firm #section-2-objectives-of-the-firm #study-session-4
Question

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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.

Original toplevel document

2. OBJECTIVES OF THE FIRM
00 – $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. <span>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 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. 2.1.3. Economic Rent The surplus value known as economic rent results when a particular resource or good is fixed in supply (with a vertical su







Flashcard 1435626769676

Tags
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Question
[...] = Accounting profit – Total implicit opportunity costs
Answer
Economic profit

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Economic profit = Accounting profit – Total implicit opportunity costs

Original toplevel document

2. OBJECTIVES OF THE FIRM
00 – $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. <span>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 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. 2.1.3. Economic Rent The surplus value known as economic rent results when a particular resource or good is fixed in supply (with a vertical su







#cfa #cfa-level-1 #economic-and-normal-profit #economics #microeconomics #reading-15-demand-and-supply-analysis-the-firm #section-2-objectives-of-the-firm #study-session-4
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.
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st , 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 <span>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 conc

Original toplevel document

2. OBJECTIVES OF THE FIRM
00 – $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. <span>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 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. 2.1.3. Economic Rent The surplus value known as economic rent results when a particular resource or good is fixed in supply (with a vertical su




#cfa #cfa-level-1 #economic-and-normal-profit #economics #microeconomics #reading-15-demand-and-supply-analysis-the-firm #section-2-objectives-of-the-firm #study-session-4
economic profit can be defined for publicly traded corporations as accounting profit less the required return on equity capital.
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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, <span>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 execu

Original toplevel document

2. OBJECTIVES OF THE FIRM
00 – $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. <span>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 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. 2.1.3. Economic Rent The surplus value known as economic rent results when a particular resource or good is fixed in supply (with a vertical su




#cfa #cfa-level-1 #economic-and-normal-profit #economics #microeconomics #reading-15-demand-and-supply-analysis-the-firm #section-2-objectives-of-the-firm #study-session-4
Consider the start-up which had an accounting profit of €300,000 and suppose that the executive who launched it stoped earning a salary of €100,000 per year in 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 he makes an investment of €1,500,000 to launch the start-up and that he might be earning €200,000 per year on that amount in a similar risk investment (opportunity cost).

Total implicit opportunity costs are €100,000 + €200,000 = €300,000 per year so economic profit is zero: €300,000 – €300,000 = €0.

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itted 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. <span>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

Original toplevel document

2. OBJECTIVES OF THE FIRM
00 – $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. <span>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 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. 2.1.3. Economic Rent The surplus value known as economic rent results when a particular resource or good is fixed in supply (with a vertical su




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Question
Consider the start-up which had an accounting profit of €300,000 and suppose that the executive who launched it stoped earning a salary of €100,000 per year in the job he left.

Besides labor, financial capital is a resource. Suppose he makes an investment of €1,500,000 to launch the start-up and that he might be earning €200,000 per year on that amount in a similar risk investment.

Total implicit opportunity costs are [...] per year so economic profit is [...]
Answer
€100,000 + €200,000 = €300,000

zero: €300,000 – €300,000 = €0.

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13; Besides labor, financial capital is a resource. Suppose he makes an investment of €1,500,000 to launch the start-up and that he might be earning €200,000 per year on that amount in a similar risk investment (opportunity cost). <span>Total implicit opportunity costs are €100,000 + €200,000 = €300,000 per year so economic profit is zero: €300,000 – €300,000 = €0. <span><body><html>

Original toplevel document

2. OBJECTIVES OF THE FIRM
00 – $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. <span>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 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. 2.1.3. Economic Rent The surplus value known as economic rent results when a particular resource or good is fixed in supply (with a vertical su







Flashcard 1435635158284

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#cfa #cfa-level-1 #economic-and-normal-profit #economics #microeconomics #reading-15-demand-and-supply-analysis-the-firm #section-2-objectives-of-the-firm #study-session-4
Question
economic profit can be defined for publicly traded corporations as [...] less [...]
Answer
accounting profit

the required return on equity capital.

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economic profit can be defined for publicly traded corporations as accounting profit less the required return on equity capital.

Original toplevel document

2. OBJECTIVES OF THE FIRM
00 – $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. <span>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 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. 2.1.3. Economic Rent The surplus value known as economic rent results when a particular resource or good is fixed in supply (with a vertical su







Flashcard 1435637517580

Tags
#cfa #cfa-level-1 #economic-and-normal-profit #economics #microeconomics #reading-15-demand-and-supply-analysis-the-firm #section-2-objectives-of-the-firm #study-session-4
Question
For publicly traded corporations [...] is the largest and most readily identified implicit opportunity cost omitted in calculating total accounting cost.
Answer
cost of equity capital

statusnot learnedmeasured difficulty37% [default]last interval [days]               
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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.

Original toplevel document

2. OBJECTIVES OF THE FIRM
00 – $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. <span>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 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. 2.1.3. Economic Rent The surplus value known as economic rent results when a particular resource or good is fixed in supply (with a vertical su







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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.
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rise 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. <span>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

Original toplevel document

2. OBJECTIVES OF THE FIRM
00 – $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. <span>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 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. 2.1.3. Economic Rent The surplus value known as economic rent results when a particular resource or good is fixed in supply (with a vertical su




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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.

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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. <span>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. <span><body><html>

Original toplevel document

2. OBJECTIVES OF THE FIRM
00 – $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. <span>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 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. 2.1.3. Economic Rent The surplus value known as economic rent results when a particular resource or good is fixed in supply (with a vertical su




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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
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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 implic

Original toplevel document

2. OBJECTIVES OF THE FIRM
00 – $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. <span>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 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. 2.1.3. Economic Rent The surplus value known as economic rent results when a particular resource or good is fixed in supply (with a vertical su




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In simple terms, normal profit is the level of accounting profit needed to just cover the implicit opportunity costs ignored in accounting costs.
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d 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). <span>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 r

Original toplevel document

2. OBJECTIVES OF THE FIRM
00 – $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. <span>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 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. 2.1.3. Economic Rent The surplus value known as economic rent results when a particular resource or good is fixed in supply (with a vertical su




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Question
In simple terms, [...] is the level of accounting profit needed to just cover the implicit opportunity costs ignored in accounting costs.
Answer
normal profit

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In simple terms, normal profit is the level of accounting profit needed to just cover the implicit opportunity costs ignored in accounting costs.

Original toplevel document

2. OBJECTIVES OF THE FIRM
00 – $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. <span>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 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. 2.1.3. Economic Rent The surplus value known as economic rent results when a particular resource or good is fixed in supply (with a vertical su







#cfa #cfa-level-1 #economic-and-normal-profit #economics #microeconomics #reading-15-demand-and-supply-analysis-the-firm #section-2-objectives-of-the-firm #study-session-4
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.
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usiness. 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. <span>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 + N

Original toplevel document

2. OBJECTIVES OF THE FIRM
00 – $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. <span>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 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. 2.1.3. Economic Rent The surplus value known as economic rent results when a particular resource or good is fixed in supply (with a vertical su




#cfa #cfa-level-1 #economic-and-normal-profit #economics #microeconomics #reading-15-demand-and-supply-analysis-the-firm #section-2-objectives-of-the-firm #study-session-4
Accounting profit = Economic profit + Normal profit
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00,000 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)  <span>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 a

Original toplevel document

2. OBJECTIVES OF THE FIRM
00 – $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. <span>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 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. 2.1.3. Economic Rent The surplus value known as economic rent results when a particular resource or good is fixed in supply (with a vertical su




#cfa #cfa-level-1 #economic-and-normal-profit #economics #microeconomics #reading-15-demand-and-supply-analysis-the-firm #section-2-objectives-of-the-firm #study-session-4
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 ).
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he 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 <span>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; &

Original toplevel document

2. OBJECTIVES OF THE FIRM
00 – $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. <span>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 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. 2.1.3. Economic Rent The surplus value known as economic rent results when a particular resource or good is fixed in supply (with a vertical su




#cfa #cfa-level-1 #economic-and-normal-profit #economics #microeconomics #reading-15-demand-and-supply-analysis-the-firm #section-2-objectives-of-the-firm #study-session-4

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.

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omic 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 ). <span>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 prof

Original toplevel document

2. OBJECTIVES OF THE FIRM
00 – $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. <span>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 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. 2.1.3. Economic Rent The surplus value known as economic rent results when a particular resource or good is fixed in supply (with a vertical su




Flashcard 1435654032652

Tags
#cfa #cfa-level-1 #economic-and-normal-profit #economics #microeconomics #reading-15-demand-and-supply-analysis-the-firm #section-2-objectives-of-the-firm #study-session-4
Question
Accounting profit = Economic profit + [...]
Answer
Normal profit

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Accounting profit = Economic profit + Normal profit

Original toplevel document

2. OBJECTIVES OF THE FIRM
00 – $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. <span>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 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. 2.1.3. Economic Rent The surplus value known as economic rent results when a particular resource or good is fixed in supply (with a vertical su







Flashcard 1435684179212

Tags
#means-of-communication #sister-miriam-joseph #special-or-common #symbols #the-function-of-language #trivium
Question
Special symbols are designed by experts to express with precision ideas in a special field of knowledge, for example: [...]
Answer
mathematics, chemistry, music

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Special symbols are designed by experts to express with precision ideas in a special field of knowledge, for example: mathematics, chemistry, music

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Flashcard 1435686538508

Tags
#means-of-communication #sister-miriam-joseph #the-function-of-language #trivium
Question
An imitation is an [...] for example [...]
Answer
artificial likeness,
a painting, photograph, cartoon

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An imitation is an artificial likeness, for example: a painting, photograph, cartoon, statue, pantomime, a gesture such as threatening with a clenched fist or rejecting by pushing away with the hands, and picture writing

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#rules-of-formulating-knowledge
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).
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20. Prioritize
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: Prioritizing sources - there will al




Flashcard 1435694664972

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#cfa #cfa-level-1 #economics #microeconomics #reading-14-demand-and-supply-analysis-consumer-demand #section-3-utility-theory #study-session-4
Question

Tom Warren currently has 50 blueberries and 20 peanuts. His marginal rate of substitution of peanuts for blueberries, MRSpb equals 4, and his indifference curves are strictly convex.

  1. Suppose that Warren is indifferent between his current bundle and one containing 40 blueberries and 25 peanuts. Describe Warren’s MRSpb evaluated at the new bundle.


Solution

[...]
Answer
The new bundle has more peanuts and fewer blueberries than the original one, and Warren is indifferent between the two, meaning that both bundles lie on the same indifference curve, where blueberries are plotted on the vertical axis and peanuts on the horizontal axis. Because his indifference curves are strictly convex and the new bundle lies below and to the right of his old bundle, his MRSpb must be less than 4. That is to say, his indifference curve at the new point must be less steep than at the original bundle.

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re strictly convex. Suppose that Warren is indifferent between his current bundle and one containing 40 blueberries and 25 peanuts. Describe Warren’s MRS pb evaluated at the new bundle. Solution <span>The new bundle has more peanuts and fewer blueberries than the original one, and Warren is indifferent between the two, meaning that both bundles lie on the same indifference curve, where blueberries are plotted on the vertical axis and peanuts on the horizontal axis. Because his indifference curves are strictly convex and the new bundle lies below and to the right of his old bundle, his MRS pb must be less than 4. That is to say, his indifference curve at the new point must be less steep than at the original bundle. <span><body><html>

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3. UTILITY THEORY: MODELING PREFERENCES AND TASTES
t MRS BW must diminish as he moves toward more bread and less wine—the MRS BW is continuously changing as he moves along his indifference curve. EXAMPLE 2 Understanding the Marginal Rate of Substitution <span>Tom Warren currently has 50 blueberries and 20 peanuts. His marginal rate of substitution of peanuts for blueberries, MRS pb equals 4, and his indifference curves are strictly convex. Determine whether Warren would be willing to trade at the rate of 3 of his blueberries in exchange for 1 more peanut. Suppose that Warren is indifferent between his current bundle and one containing 40 blueberries and 25 peanuts. Describe Warren’s MRS pb evaluated at the new bundle. Solution to 1: MRS pb = 4 means that Warren would be willing to give up 4 blueberries for 1 peanut, at that point. He clearly would be willing to give up blueberries at a rate less than that, namely, 3-to-1. Solution to 2: The new bundle has more peanuts and fewer blueberries than the original one, and Warren is indifferent between the two, meaning that both bundles lie on the same indifference curve, where blueberries are plotted on the vertical axis and peanuts on the horizontal axis. Because his indifference curves are strictly convex and the new bundle lies below and to the right of his old bundle, his MRS pb must be less than 4. That is to say, his indifference curve at the new point must be less steep than at the original bundle. 3.4. Indifference Curve Maps There was nothing special about our initial choice of bundle a as a starting point for the indifferenc







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#means-of-communication #sister-miriam-joseph #the-function-of-language #trivium
Question
Even though imitation is a clear means of communication, it is limited, difficult , slow, and unable to express [...] of things.
Answer
the essences

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Even though imitation is a clear means of communication, it is limited, difficult , slow, and unable to express the essences of things. Imagine picture writing your next letter to a friend. Within limits, however, imitation is a vivid and effective mode of communicat ion.

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Flashcard 1435700169996

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#citychef #munchery
Question
Munchery’s [...] pose one of the main drags on its business.
Answer
high fixed costs

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Munchery’s high fixed costs pose one of the main drags on its business.

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How an immigrant motherfucker made munchery
a few hours a day around din-nertime. The CEOs were “advocating for a way to make this fair for workers but to allow our businesses to operate,” he says. “Every presi-dential candidate is going to have to deal with this subject.” <span>Munchery’s high fixed costs pose one of the main drags on its business. Services such as GrubHub, which connect diners and restaurants online, don’t have significant fixed costs, because the restaurants make the food and in most cases deliver it to customers. Tran and his executives, naturally, pitch Munchery’s expensive infra structure as its biggest advantage. It enables the company to control all of its operating costs, so it







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#citychef #munchery
Question
The closest direct competitor Munchery has is [...]
Answer
Sprig

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The closest direct competitor Munchery has is Sprig

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How an immigrant motherfucker made munchery
hing to build, but when we’ve built it, it’s going to be incredibly difficult to compete with,” says Kris Fredrickson, Munchery’s vice president for operations, who joined the company after six years as a banker at Goldman Sachs. <span>The closest direct competitor Munchery has is Sprig, another San Francisco startup with a haul of venture capital—more than $50 million—a centralized kitchen (in a former Chevys Fresh Mex restaurant), and a gospel of high-quality, low-co







Flashcard 1435703315724

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#cfa #cfa-level-1 #economics #microeconomics #reading-14-demand-and-supply-analysis-consumer-demand #section-2-consumer-theory-from-preferences-to-demand-function #study-session-4-microeconomics-analysis
Question
In Consumer Choice Theory, Instead of assuming the existence of a demand curve, it derives a demand curve as an implication of assumptions [...]
Answer
about preferences.

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Consumer choice theory still makes assumptions, but does so at a more fundamental level. Instead of assuming the existence of a demand curve, it derives a demand curve as an implication of assumptions about preferences.

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2. CONSUMER THEORY: FROM PREFERENCES TO DEMAND FUNCTIONS
and as a logical extension of consumer choice theory. Although consumer choice theory attempts to model consumers’ preferences or tastes, it does not have much to say about why consumers have the tastes and preferences they have. <span>It still makes assumptions, but does so at a more fundamental level. Instead of assuming the existence of a demand curve, it derives a demand curve as an implication of assumptions about preferences. Note that economists are not attempting to predict the behavior of any single consumer in any given circumstance. Instead, they are attempting to build a consistent model of aggregate m







Flashcard 1435704888588

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#cfa #cfa-level-1 #economics #microeconomics #reading-14-demand-and-supply-analysis-consumer-demand #section-2-consumer-theory-from-preferences-to-demand-function #study-session-4-microeconomics-analysis
Question
economists are not attempting to [...] in any given circumstance.
Answer
predict behavior

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economists are not attempting to predict the behavior of any single consumer in any given circumstance. Instead, they are attempting to build a consistent model of aggregate market behavior in the form of a market demand curve.

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2. CONSUMER THEORY: FROM PREFERENCES TO DEMAND FUNCTIONS
astes and preferences they have. It still makes assumptions, but does so at a more fundamental level. Instead of assuming the existence of a demand curve, it derives a demand curve as an implication of assumptions about preferences. Note that <span>economists are not attempting to predict the behavior of any single consumer in any given circumstance. Instead, they are attempting to build a consistent model of aggregate market behavior in the form of a market demand curve. Once we model the consumer’s preferences, we then recognize that consumption is governed not only by preferences but also by the consumer’s budget constraint (the ability







Flashcard 1435707247884

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#italian #italian-grammar
Question
A gerund is a verb form ending in [...]:

Answer
-ando or -endo

parlando ‘speaking’; sorridendo ‘smiling’; finendo ‘finishing’.

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A gerund is a verb form ending in -ando or -endo: parlando ‘speaking’; sorridendo ‘smiling’; finendo ‘finishing’. The gerund is most often used in Italian along with the verb stare to express a continuous action or event: sto finendo

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