Work through the list without notes. If you cannot do a statement, follow its link, then come back. Guide = study guide; Practice = practice questions.
Understanding
- I can tell an explicit cost from an implicit cost, including interest on a loan versus forgone interest on the owner’s savings. (Guide: “The implicit costs of running a firm”; Practice Q1)
- I can name the main implicit costs of a firm: the owner’s time, the cost of financial capital, forgone rent and compensation for risk. (Guide: “The implicit costs of running a firm”; Practice Q4, Q7(c))
- I can define accounting profit, economic profit and normal profit. (Guide: “Accounting profit and economic profit”; Practice Q2)
- I can explain why economic profit is never larger than accounting profit. (Guide: Figure 1)
Calculation
- I can calculate accounting profit and economic profit from total revenue and lists of costs. (Guide: Worked example 1; Practice Q3, Q4)
- I can calculate economic profit as (P − ATC) × Q and find accounting profit from per-unit implicit costs. (Guide: Worked example 2; Practice Q5)
- I can find the accounting profit, price or alternative salary that gives exactly normal profit. (Guide: Worked example 1(c); Practice Q4(c), Q5(d), Q7(b))
Reasoning
- I can explain why a firm can show an accounting profit and still make an economic loss. (Guide: Worked example 1(d); Practice Q5(c))
- I can explain why firms respond to economic profit rather than accounting profit. (Guide: “How firms respond to profit”; Practice Q6(b))
- I can predict entry, exit or no change from the sign of economic profit. (Guide: Worked example 2(c); Practice Q6(a))
- I can explain why zero economic profit is not a reason to close. (Guide: “Normal profit”; Practice Q6(c))
All ticked? Move on to Topic 3.5, Profit Maximization, or return to the course roadmap.